Question

Reconcile your position on the issue of return predictability with asset pricing anomalies and the apparent lack of manager skill.

Answer 1

Financial experts predict that future stock returns were recognized by the variables like yield, dividend and spread. Many studies are conducted to find out the return predictability.

Predicting the Performance of Equity Anomalies in Frontier Emerging Markets: a Markov Switching Model Approach

The above article aims to show the predictability of transient anomalies will be profitable using Markov Switching apporach. The Markov Switching model express the time series pattern of expected returns will depend on the type of anomaly.

Recent literature study has developed many topics on equity anomalies. The studies resulted in a conclusion that if a market's efficiency develops and improves, the profitability of anomaly declines. However studies by Jacobs (2016) suggest the opposite result of equity anomalies. It explains that anomalies will raise if the market develops.

To determine the equity anomalies behaviour, the present study was conducted by Markov Switching approach.

The research concludes with the application of Markov Switching approach manifest that anomaly profitability is very far from the stable market. Anomalies applied with dividends are unprofitable but give returns at a long term. Also, Markov Switching model helps in selecting a good strategy for business.

Citation

"Predicting the Performance of Equity Anomalies in Frontier Emerging Markets: a Markov Switching Model Approach", Economic Research Journal, Vol 32, 2019.

https://www.tandfonline.com/action/showCitformats.doi

Reference

1. Schwert. G. W. (2003). Chapter 15: Anomalies and Market efficiency. Financial Markets and Asset Pricing, 1, 939- 974. Doi: 10.1016/s1574- 0102(03)01024-0

2. Doron Avramov, "Stock Return Predictability and Asset Pricing Models', The Review of Financial Studies, Vol 17, No. 3 (Autumn 2004), pp. 699- 738.

Lack of Manager Skill

Management Skill is the one which enables the manager to manage other personnel efficiently and effectively. The managerial skill helps the manager to guide his junior officers, to provide strategic hep to senior management and doing his/ her work effectively. Therefore, managerial skill is an important one for all managers. Lack of managerial skill will affect the manager and whole management also.

1. Lack of Communication among managers may lead to misunderstanding. Communication is mixed with the leadership as it gives a strong, sound and motivating leader.
2. If the managers spend a long time in taking break, avoiding his work, do not response to his staff, he may be taken severe actions by the human resource department of the firm to do his work correctly.
3. The employees may feel frustrated, disengaged and inactive if the manager fails to encourage them and not giving clear explanation about any important matter or issues. It will make the employees also to be dormant and lack of enthusiasm on doing work. This result in low productivity in the firm.
4. Not paying attention to the employees' problems will make lower employee morale. Hence, it affects the whole morale of the firm.
5. Taking responsibility of the employee by the manager will help the employee to clear his doubt and work effectively. When the manager is not taking responsibility, the employee will not make his job correctly and there are chances of having mistakes. This may affect managerial and even financial position of the company.

Hence, lack of manager skill will affect the firm financially, economically and morally. Selecting a skillful manager can make a firm to gain higher rewards in all aspects. Therefore the manager should be confident, knowledgeable, up- to date about market conditions, better communication skill, decision maker and have problem solving skill.