Alexeev, V, Dungey, M & Yao, W 2016, 'Continuous and Jump Betas: Implications for Portfolio Diversification', Econometrics, vol. 4, no. 2, pp. 27-27.
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Using high-frequency data, we decompose the time-varying beta for stocks into beta for continuous systematic risk and beta for discontinuous systematic risk. Estimated discontinuous betas for S&P500 constituents between 2003 and 2011 generally exceed the corresponding continuous betas. We demonstrate how continuous and discontinuous betas decrease with portfolio diversification. Using an equiweighted broad market index, we assess the speed of convergence of continuous and discontinuous betas in portfolios of stocks as the number of holdings increase. We show that discontinuous risk dissipates faster with fewer stocks in a portfolio compared to its continuous counterpart.
Bird, R, Foster, D, Gray, J, Raftery, AM, Thorp, S & Yeung, D 2016, 'Experiences of Current and Former Members of Self-Managed Superannuation Funds', CIFR Paper, vol. 46, no. 128, pp. 304-325.
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We surveyed 854 current and 147 former members of self-managed superannuation funds (SMSFs) in 2016. The results of our survey document their aspirations, operational practices and experiences. Both current and former members expressed high general interest in superannuation, but ‘detractors’ of SMSFs outnumbered ‘promoters’. SMSF members said they enjoy ‘control’ of investment, but a majority delegated tasks to financial professionals. Three times as many members rated the performance of their fund as above the SMSF average as below, although most did not measure the performance of their fund adequately. The probability of closing a SMSF is significantly higher if members use net returns, rather than other indicators such as account balance, to judge performance. JEL Classification: H55, H75, J32
Casavecchia, L 2016, 'Fund managers' herding and the sensitivity of fund flows to past performance', INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS, vol. 47, pp. 205-221.
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Casavecchia, L 2016, 'Fund managers’ herding and mutual fund governance', International Journal of Managerial Finance, vol. 12, no. 3, pp. 242-276.
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Purpose – The purpose of this paper is to identify the implications of managerial herding for investors’ wealth and capital allocation across funds, and the critical role played by fund governance in monitoring herding incentives. Design/methodology/approach – The author adopt the fund herding measure first proposed by Grinblatt et al. (1995) over the long sample period 1992-2007. Univariate and multivariate tests are then constructed to examine the relationship between managerial herding, performance, and investors’ sensitivities. OLS, fixed-effect panel data models are utilized to conduct the tests. Findings – The author show that managers that do not herd have above-average managerial skills, trade less on noise, and significantly outperform herding managers. The author also illustrate that although fund herding could be used as a signal of managerial quality, underperforming herding funds manage to survive in equilibrium, indicating that investor flows do not adequately respond to the information content of a persistent herding behavior. Finally, the author demonstrate that better governance in the form of stronger managerial incentive schemes constitutes a significant deterrent against detrimental herding strategies, representing an effective monitoring device of the response of fund managers to poor flow-performance sensitivity. Originality/value – The paper provide...
Casavecchia, L & Tiwari, A 2016, 'Cross trading by investment advisers: Implications for mutual fund performance', JOURNAL OF FINANCIAL INTERMEDIATION, vol. 25, pp. 99-130.
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Doan, MP, Alexeev, V & Brooks, R 2016, 'Concurrent momentum and contrarian strategies in the Australian stock market', AUSTRALIAN JOURNAL OF MANAGEMENT, vol. 41, no. 1, pp. 77-106.
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Foley, S & Putniņš, TJ 2016, 'Should We Be Afraid of the Dark? Dark Trading and Market Quality', Journal of Financial Economics, vol. 122, no. 3, pp. 456-481.
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© 2016 We exploit a unique natural experiment—recent restrictions of dark trading in Canada and Australia—and proprietary trade-level data to analyze the effects of dark trading. Disaggregating two types of dark trading, we find that dark limit order markets are beneficial to market quality, reducing quoted, effective, and realized spreads and increasing informational efficiency. In contrast, we do not find consistent evidence that dark midpoint crossing systems significantly affect market quality. Our results support recent theory that dark limit order markets encourage aggressive competition in liquidity provision. We discuss implications for the regulation of dark trading and tick sizes.
Glover, KJ & Hambusch, G 2016, 'Leveraged investments and agency conflicts when cash flows are mean reverting', JOURNAL OF ECONOMIC DYNAMICS & CONTROL, vol. 67, pp. 1-21.
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© 2016 Elsevier B.V.. We analyse the effect of mean-reverting cash flows on the costs of shareholder-bondholder conflicts arising from partially debt-financed investments. In a partial equilibrium setting we find that such agency costs are significantly lower under mean-reverting (MR) dynamics, when compared to the ubiquitous geometric Brownian motion (GBM). The difference is attributed to the stationarity of the MR process. In addition, through the application of a novel agency cost decomposition, we show that for a larger speed of mean reversion, agency costs are driven mainly by suboptimal timing decisions, as opposed to suboptimal financing decisions. In contrast, under the standard GBM assumption the agency costs are driven mainly by suboptimal financing decisions for large growth rates and by suboptimal timing decisions for smaller or negative growth rates.
Hambusch, G & Shaffer, S 2016, 'Forecasting bank leverage: an alternative to regulatory early warning models', JOURNAL OF REGULATORY ECONOMICS, vol. 50, no. 1, pp. 38-69.
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Kellner, R, Roesch, D & Scheule, H 2016, 'The role of model risk in extreme value theory for capital adequacy', JOURNAL OF RISK, vol. 18, no. 6, pp. 39-70.
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© 2016 Incisive Risk Information (IP) Limited. In the recent literature, methods from extreme value theory (EVT) have frequently been applied to the estimation of tail risk measures. While previous analyses show that EVT methods often lead to accurate estimates for risk measures, a potential drawback lies in large standard errors of the point estimates in these methods, as only a fraction of the data set is used. Thus, we comprehensively study the impact of model risk on EVT methods when determining the value-at-risk and expected shortfall. We distinguish between first-order effects of model risk, which consist of misspecification and estimation risk, and second-order effects of model risk, which refer to the dispersion of risk measure estimates, and show that EVT methods are less prone to first-order effects. However, they show a greater sensitivity toward secondorder effects.We find that this can lead to severe value-at-risk and expected shortfall underestimations and should be reflected in regulatory capital models.
Kovacevic, A, Hambusch, G, Michayluk, D & Van de Venter, T 2016, 'The Effectiveness of Ethics Training on the Development of Moral Judgement in Finance Students', Australasian Journal of Economics Education, vol. 13, no. 2, pp. 1-31.
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This paper reports on the effects of a freestanding ethics course in a universityfinance curriculum on the moral development of students. While a number ofstudies have examined the effects of such educational initiatives on business andaccounting students, very few studies have focused on the finance discipline. AModified Defining Issues Test (MDIT) was thus developed and used in a test-retestmethodology to examine whether students in the Ethics in Finance course at theUTS Business School possessed enhanced moral development after taking thecourse. We find evidence of a statistically significant improvement in moralreasoning understood from a Kohlbergian perspective. This effect was, however,more pronounced in males than females with females beginning from a higher baseof moral development and improving only slightly. While a number of suggestionsare made for future research that might improve on the work reported in this paper,our results justify t
Navone, M & Nocera, G 2016, 'Unbundling the Expense Ratio: Hidden Distribution Costs in European Mutual Fund Markets', EUROPEAN FINANCIAL MANAGEMENT, vol. 22, no. 4, pp. 640-666.
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© 2015 John Wiley & Sons, Ltd. Using data on more than 5,000 mutual funds domiciled in four European countries in 2006, we investigate whether distribution costs embedded into the expense ratio can be held responsible for the differences of expense ratios of mutual funds in different countries. We confirm the existence of relevant country effects in the pricing of mutual fund management services. Comparing load and no-load funds and using survey data on fee retrocession to the distribution channel, we provide evidence that these effects are heavily influenced by the cost of the distribution embedded in the expense ratio.
Patel, V & Michayluk, D 2016, 'Return predictability following different drivers of large price changes', International Review of Financial Analysis, vol. 45, pp. 202-214.
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© 2016 Elsevier Inc. This study uniquely examines return predictability following different drivers of large price changes. We use several novel features of the Australian information generation environment to overcome identification issues of large price changes inherent in earlier studies. In contrast to prior results, we find that large price changes are permanent when they are driven by public information consistent with the semi-strong efficient markets hypothesis and also when driven by private information. For large price changes which do not correspond with information, we show that investors could profit from the subsequent over-reaction in returns.
Rösch, D & Scheule, H 2016, 'Systematic Credit Risk and Pricing for Fixed Income Instruments', The Journal of Fixed Income, vol. 26, no. 1, pp. 42-60.
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© 2015 Institutional Investor LLC. All Rights Reserved. This article analyzes the sensitivity to systematic credit risk and pricing in fixed income instruments and compares corporate bonds and asset securitizations. The article finds crosssectional variation of systematic credit risk given the same credit rating and a market premium for the systematic risk embedded in yield spreads. Therefore, credit ratings do not provide comprehensive information on the degree of systematic risk, and investors are compensated for such differences in systematic risk after controlling for credit ratings and other risk characteristics.
Rösch, D & Scheule, H 2016, 'The role of loan portfolio losses and bank capital for Asian financial system resilience', Pacific-Basin Finance Journal, vol. 40, pp. 289-305.
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This paper analyses the systemic risk in relation to bank lending for Asian economies. The methodology complements existing market-based systemic risk measures by providing measures based on accounting information that regulators typically collect. Loan loss provisions of banks are decomposed into (i) a prediction component that is based on observable bank characteristics, and (ii) two frailty components: a bank-specific systematic factor based on the assumption that a bank's asset portfolio is diversified and a systemic factor. Systemic risk is measured as the Value-at-Risk and Expected Shortfall of the financial system based on a simulation model that takes into account the current condition of banks in the financial system, the absolute size and the capitalisation of financial institutions, as well as the sensitivity to systematic and systemic frailty risk.
Zhao, RL 2016, 'Dividend signaling: What can we learn from corporate bond responses?', Journal of Internet Banking and Commerce, vol. 21, no. 1, pp. 1-16.
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The literature has reported significant abnormal returns associated with the announcements of dividend changes. Various hypotheses such as information signaling hypothesis, agency theory and wealth transfer hypothesis, have been suggested to explain the abnormal returns and volumes following the corporate stock dividend changes. The response of corporate bond, as a related security not subject to the immediate capitalization changes are used to provide evidence to help distinguish between the signaling and wealth transfer hypothesis. Corporate bonds have a significant decline in bond yields following dividend increase and a significant increase in bond yields following dividend decrease, supporting signaling hypothesis rather than wealth transfer effect.
Cheng, B, Sklibosios Nikitopoulos, C & Schlogl, E 1970, 'Empirical Hedging Performance on Long-Dated Crude Oil Derivatives', Quantitative Methods in Finance 2016, Sydney, Australia.
Patel, VG & Michayluk, D 1970, 'Disentangling the different sources of value creation for US divestitures', Financial Management Association Asia-Pacific Conference, Sydney, Australia.
Patel, VG, Putnins, T, Michayluk, D & Foley, S 1970, 'Price discovery in stock and options markets', Society for Financial Studies Finance Cavalcade, Toronto, Canada.
Xu, J & Choi, S 1970, 'Why Do Underperforming CEOs Retain Their Jobs? Evidence from Executive Turnover', 2016 Auckland Finance Meeting, Ackland, New Zealand.
Cheng, B, Nikitopoulos Sklibosios, C & Schlogl, E 2016, 'Empirical Hedging Performance of Long dated Commodity Derivatives', Research Paper: 376, Quantitative Finance Research Centre, University of Technology Sydney.
Cheng, B, Nikitopoulos Sklibosios, C & Schlogl, E 2016, 'Empirical Pricing Performance on Long Dated Crude Oil Derivatives: Do Models with Stochastic Interest Rates Matter?', Research Paper: 367, Quantitative Finance Research Centre, University of Technology Sydney.
Cheng, B, Sklibosios Nikitopoulos, C & Schlogl, E 2016, 'Hedging Futures Options with Stochastic Interest Rates', Research Paper: 375, Quantitative Finance Research Centre, University of Technology Sydney.
Cheng, B, Sklibosios Nikitopoulos, C & Schlogl, E 2016, 'Pricing of Long-Dated Commodity Derivatives with Stochastic Volatility and Stochastic Interest Rates'.
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Aiming to study pricing of long-dated commodity derivatives, this paper presents a class of models within the Heath, Jarrow, and Morton (1992) framework for commodity futures
prices that incorporates stochastic volatility and stochastic interest rate and allows a correlation structure between the futures price process, the futures volatility process and the
interest rate process. The functional form of the futures price volatility is specified so that the model admits finite dimensional realisations and retains affine representations,
henceforth quasi-analytical European futures option pricing formulae can be obtained. A sensitivity analysis reveals that the correlation between the interest rate process and the futures
price process has noticeable impact on the prices of long-dated futures options, while the correlation between the interest rate process and the futures price volatility process does not
impact option prices. Furthermore, when interest rates are negatively correlated with futures prices then option prices are more sensitive to the volatility of interest rates, an effect
that is more pronounced with longer maturity options.
Chiarella, C, Sklibosios Nikitopoulos, C, Schlogl, E & Yang, H 2016, 'Pricing American Options Under Regime Switching Using Method of Lines'.
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This paper considers the American option pricing problem under regime-switching by using the method-of-lines (MOL) scheme. American option prices in each regime involve prices
in all other regimes. We treat the prices from other regimes implicitly, thus guaranteeing consistency. Iterative procedures are required but very few iterative steps are needed in
practice. Numerical tests demonstrate the robustness, accuracy and efficiency of the proposed numerical scheme. We compare our results with Buffington and Elliott (2002)’s analytical
approximation under two regimes. Our MOL scheme provides improved results especially for out-of-the money options, possibly because they use a separation of variable approach to the PDEs
which cannot hold around the early exercise region. We also compare our results with those of Khaliq and Liu (2009) and suggest that their implicit scheme can be improved.
Glover, KJ & Hambusch, G 2016, 'Leveraged Investments and Agency Conflicts When Cash Flows are Mean Reverting'.
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We analyse the effect of differing uncertainty assumptions on the costs of shareholder-bondholder conflicts arising from partially debt-financed investments. A partial equilibrium model, valid for a large class of diffusion
processes, is developed and then applied to the specific cases of a geometric Brownian motion (GBM) and a mean-reverting (MR) process. This allows for the comparison of the two scenarios and contributes to the ongoing discussion on the
effects of mean reversion on investment and financing behaviour. We find that agency costs are much lower under MR dynamics and, through the application of a novel agency cost decomposition, we show that for a high expected growth in
future profits (high growth GBM) agency costs are driven mainly by suboptimal financing decisions, as opposed to suboptimal (default and investment) timing decisions. The situation is reversed for lower growth assumptions and for an
increase in the speed of mean reversion. Our results on the components and drivers of agency costs are valuable to both policy makers and regulators alike.
Jin, M, Li, Y, Wang, J-X & Yang, YC 2016, 'Price Discovery in the Chinese Gold Market'.
Patel, VG & Michayluk, D 2016, 'Disentangling the different sources of value creation for US divestitures'.
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Seminar Presentation
