Amalia Di Iorio

An analysis of asymmetry in foreign currency exposure of the Australian equities market

Abstract Using both daily and monthly data, the authors: (a) analyse the extra-market component of foreign exchange exposure of the Australian equities market using the Australian/US exchange rate factor return in an augmented market model; and (b) use a dummy variable specification to model the potential asymmetric effect induced by non-linear hedging strategies, such as using currency options, for the period 1988–1996. Overall, the results are mixed. The following are found: (i) stronger evidence of foreign exchange exposure in the analysis employing daily data; (ii) when using daily data, a stronger lagged response than a contemporaneous response is observed; (iii) some evidence of asymmetry; and (iv) evidence of significant exchange rate exposures of the predicted sign in several industries. Further, the findings using monthly data are less significant than those using daily data.

The pricing of foreign exchange risk in the Australian equities market

The issue of whether foreign exchange risk is priced in financial markets is important in the context of international investment and diversification. Primarily using daily data, we implement a two-factor asset pricing model (incorporating a market factor and an exchange rate factor) in an attempt to provide some insight into the pricing of foreign exchange risk in the Australian equities market for the period 1988-1998. Initially testing a basic version of the model, we find that exchange rate risk is priced in the Australian equities market for the full sample period. Further, our analysis of four major subperiods indicates that the pricing occurs in periods of economic decline and a secularly weak Australian dollar (namely, 1990-1993 and 1997-1998). We extend our investigation by testing a zero-beta version, as well as an orthogonalized version, of the same model. The results of both analyses support our initial findings.

A test of the stability of exchange rate risk: Evidence from the Australian equities market

Abstract This paper investigates the sensitivity of equity returns on Australian industry portfolios to an exchange rate factor for the period 1988–1998. Specifically, using daily data, we (1) analyse the exchange rate exposure of the Australian equities market by implementing a basic augmented market model using relevant bilateral exchange rates, (2) investigate the intertemporal stability of the exchange rate exposure by using a dummy variable specification, and (3) attempt to establish the determinants of the exchange rate exposure of Australian industries by undertaking a cross-sectional analysis. A further empirical issue addressed by our study is that of whether the sensitivity is contemporaneous or lagged. We find (a) some evidence of exchange rate exposure, (b) some evidence of intertemporal sensitivity, and (c) a greater sensitivity to movements in the Australian dollar/US dollar exchange rate factor than to movements in the Australian dollar/Japanese yen. Further, we observe a significant lagged effect when employing the basic augmented model. This difference in the response of the industry portfolio returns is not observed, however, in our intertemporal stability investigation. Finally, we do not find significant evidence in terms of the cross-sectional determinants of foreign exchange exposure.

Asymmetry and time variation in exchange rate exposure: An investigation of Australian stocks returns

Purpose – The purpose of this paper is to provide some insights into the exchange rate exposure of Australian stock returns.Design/methodology/approach – Using a dynamic econometric approach that allows for both asymmetry and time‐varying risk exposures in both the exchange rate variable and the market variable, a large sample of Australian firms were tested over the period of January 2001 and December 2005. The data were analysed using three different classification methods, forming portfolios according to industry sector, size deciles, and censoring deciles.Findings – Although the evidence of exchange rate exposure is limited across the sample of industries, the following were found: a time‐varying asymmetric effect primarily in the utilities sector, time‐varying exposure in the materials and energy sectors, and an asymmetric effect in the technology sector. Further, some time‐varying asymmetric exchange rate exposure was found across most size and censoring deciles and also substantial evidence of a po...

The Pricing of Idiosyncratic Volatility: An Australian Study

This study examines the importance of idiosyncratic volatility in asset pricing for Australian stock returns from January 2002 to December 2010. Inspired by work from the early 1990s which found that portfolios constructed to mimic common risk factors explained significant variations in US stock returns, we construct an idiosyncratic volatility mimicking factor to explore the explanatory power of this factor in the Australian stock market. Our results indicate that (a) the idiosyncratic volatility mimicking factor is priced and positively related to the stock returns for the sample period, (b) the explanatory power of the idiosyncratic volatility mimicking factor remains robust in both time-series and cross-sectional analysis, and (c) big size stocks are systematically riskier than small size stocks.

Foreign Exchange Exposure and Pricing in the Australian Equities Market: A Fama and French Framework

This study analyses the foreign exchange exposure of the Australian equities market to movements in the Australian dollar/Japanese yen (AUDJPY) and the Australian dollar/US dollar (AUDUSD) in a Fama-French framework using both daily data and monthly data. In addition to simply investigating exchange rate exposure by augmenting the Fama-French three factor model with the exchange rate factor, this paper examines the nature of exchange rate exposure in a number of different settings. Specifically, it explores (i) the possibility of an asymmetric response; (ii) its intertemporal stability over the sample period; (iii) the effect of increasing return measurement intervals; and (iv) the pricing of exchange rate risk in the Australian equities market. This study also investigates a possible lagged response to fluctuations in the exchange rate factor. Although the results are mixed, a summary of the outcome of our investigation is as follows: (i) daily data provides stronger results than monthly data; (ii) there is some evidence of a lagged response; (iii) implementing the AUDUSD exchange rate factor provides stronger results in the basic multi-factor and the stability analyses; (iv) there is some evidence of a weak asymmetric response, intertemporal sensitivity and pricing of exchange rate risk in the Australian equities market; (v) there is evidence that exchange rate exposure increases as the return intervals increase; (vi) the Fama-French book-to-market factor and size factor are strongly significant throughout each of the analyses, hence supporting the Fama-French framework.

Does idiosyncratic volatility predict future growth of the Australian economy

Purpose – This paper aims to examine whether idiosyncratic volatility and other asset pricing factors predict growth rates of the ten Australian economic indicators. Design/methodology/approach – The authors use the Liew and Vassalou (2000) model augmented with an idiosyncratic volatility factor to investigate the issue. Findings – Using regression analysis, the authors find that the asset pricing factors can be used to predict the growth rates for eight out of the ten economic indicators. Moreover, using portfolio performance analysis, the authors find that high returns of size factor and a book-to-market factor portfolios precede periods of good macroeconomic states, whereas high returns of HIMLI portfolios precede periods of bad macroeconomic states. Originality/value – To the authors’ knowledge, the relationship between idiosyncratic volatility and Australian economic growth has not been investigated explicitly in the literature.

Equity fund performance: Can momentum be explained by the pricing of idiosyncratic volatility?

Purpose This paper aims to investigate whether idiosyncratic volatility is priced in returns of equity funds while controlling for fund size and return momentum. Design/methodology/approach Following Fama and French (1993), an idiosyncratic volatility mimicking factor and a fund-size factor are constructed. The pricing ability of this idiosyncratic volatility mimicking factor is investigated in the context of Carhart (1997). Findings Idiosyncratic volatility is an important pricing factor even when controlling for fund size and momentum. In addition, idiosyncratic volatility is strongly and positively associated with the momentum effect. Further, when controlling for the association between the momentum effect and idiosyncratic volatility, the explanatory power of the momentum factor almost disappears, which suggests the pricing of idiosyncratic volatility mediates momentum and returns. Originality/value These findings imply that both the idiosyncratic volatility factor and the fund-size factor should not be ignored by fund managers when evaluating the performance of the equity funds.

An international market model and exchange rate risk: Australian evidence

The purpose of this paper is to investigate the sensitivity of Australian stock returns to US market returns, via an international market model. Our study investigates the relative sensitivity to (1) the US return denominated in Australian dollars and (2) the US market return decomposed into its two component factors (the US market return expressed in US dollars and the AUDUSD exchange rate return). Our results suggest that Australian industries are differentially sensitive to changes in the US market and to exchange rate movements.

The (in)effective regulation of incorporated legal practices: an Australian case study

Abstract The incorporation of legal practices exposes legal practitioners to great commercial pressures, posing particular challenges to the regulation of the legal profession. Regulatory theory suggests that an effective regulatory regime would: (1) address an identified collective problem; (2) have a regulator(s) responsive to the non-compliances of regulatees; (3) adopt a regulatory structure and a system of checks and balances to mitigate capture of the regulators by the regulatees; (4) delegate power appropriately amongst the actors; and (5) employ a hierarchy of sanctions with the credible threat of a heavy ultimate penalty. When the structure of Victorias regulatory system and performance of its participants is compared to these theoretical prescriptions, it can be seen that the regulation of incorporated legal practices (ILPs) is currently ineffective. Correction will require, at a minimum, a more explicit recognition of the problems that ILPs present, a restructure of the regulatory environment, and redistribution of powers amongst the regulators. This conclusion carries implications for all Australian states and territories permitting incorporated legal practice, and should inform the British regulation of alternative business structures (ABSs).