Arief Daynes

Size effect, methodological issues and ‘risk-to-default’: evidence from the UK stock market

This paper re-examines the small firm premium in the UK from December 1987 to December 2004 using a new survivorship bias-free and look-ahead bias-free database of the UK market covering stocks officially listed in the UK during this period. Prior research (Dimson, E., and P.R. Marsh. 1987. The Hoare Govett smaller companies index for the UK. Hoare Govett Limited, January; Dimson, E., and P.R. Marsh. 1999. Murphys law and market anomalies. Journal of Portfolio Management 25, no. 2: 53–69) documented an annual small-size premium in the UK market of around 6% during the period 1955–1986 and an annual small-size discount of 6% during the years 1989–1997. Our results show a continuation of the small firm premium in the UK during 1988–2004 in excess of 7% per year. We conclude that the reversal of the small firm premium documented by Dimson and Marsh (1999. Murphys law and market anomalies. Journal of Portfolio Management 25, no. 2: 53–69) is dependent on the data sample and methodology used. The main contribution to the 7%+geometric annual premium reported here comes mainly during the years 1993 and 1999. Furthermore, exploitation of the small firm premium depends on the strategy used and in particular on the length of the holding period before rolling over the strategy. Thus, while it can be argued that an economically significant small firm anomaly continues to exist, it appears to be sample-dependent, time-varying and unreliable, and difficult to exploit in practice.

The time-varying nature of the overreaction effect: evidence from the UK

Previous studies on the overreaction effect in UK show that prior losers consistently outperform prior winners in the period 1975 to 1990. This paper extends current knowledge by assessing the presence of the effect in the UK market for the period of 1987 to 2007. In contrast to earlier research, we produce evidence of a weak presence of the overreaction effect in the UK for the last decade. Further examination reveals that after adjusting for size, the effect almost disappears, while any considerable excess post-formation return to prior-losers is related to alternative market cycles and especially the periods 1987-1990 and the post-2002 era. These studies together imply that the presence of the overreaction effect in the UK stock market is time-varying and difficult to exploit in practice.

A strictly finitary non-triviality proof for a paraconsistent system of set theory deductively equivalent to classical ZFC minus foundation

Abstract. The paraconsistent system CPQ-ZFC/F is defined. It is shown using strong non-finitary methods that the theorems of CPQ-ZFC/F are exactly the theorems of classical ZFC minus foundation. The proof presented in the paper uses the assumption that a strongly inaccessible cardinal exists. It is then shown using strictly finitary methods that CPQ-ZFC/F is non-trivial. CPQ-ZFC/F thus provides a formulation of set theory that has the same deductive power as the corresponding classical system but is more reliable in that non-triviality is provable by strictly finitary methods. This result does not contradict Gödels incompleteness theorem because the proof of the deductive equivalence of the paraconsistent and classical systemss use non-finitary methods.

Understanding and evaluation of risk in Sukuk structures

Purpose This paper aims to reviews Sukuk risk classification schemes based on extending and adapting the risk classification schemes of conventional finance. It is then argued that risk classification schemes based on Sukuk structure provide significant insights into Sukuk risk not obtainable from conventional schemes. This is because Sukuk structure risk classification schemes link Sukuk risk more directly to the fundamental causal factors creating those risks. These links are less evident in conventional risk classification schemes. It is hypothesised that Sukuk structure risk factors will prove to be highly significant in multifactor expected return regressions. Design/methodology/approach The paper argues that, given the paucity of the empirical data currently available to researchers in Islamic finance, greater care needs to be taken in hypothesis development than is necessary for conventional finance. The limited data available should be used for testing hypotheses and not “wasted” in hypothesis formation. Through a meta-analysis of the existing literature on Sukuk risk, it is hypothesised that Sukuk structure risks will be highly significant in explaining Sukuk returns and returns volatilities in empirical tests. Findings The main Sukuk structures, debt based, equity based, assets based, agency based and hybrid structures, arise directly from the requirement of Sukuk to conform to the Shariah and to the fundamental ethical principles of Islamic finance and business. Further, Sukuk risk profiles are directly related to Sukuk structures. Thus, Sukuk structure risks are essentially Shariah risks. The paper presents a Sukuk risk classification matrix based on an evaluation of Sukuk structure risks. Research limitations/implications The findings on the relation of Sukuk risks to Sukuk structures require corroboration by rigorous empirical tests. Social implications The paper contributes to work on the creation of evidence-based risk management techniques in Islamic finance and to the expansion of ethical financial management. Originality/value The paper is one of the early detailed academic studies on the evaluation of risks arising from Sukuk structures.

Introducing a New Logical Framework for Modelling Reflexivity in Financial Markets

The vicious positive and negative feedback loops (vicious reflexivities) that occur in all areas of the social sciences have the same structure as the logical paradoxes of the Liar and Anti-Liar, and of the corresponding Russell and Anti-Russell paradoxes in set theory. In recent decades the logical and set-theoretic paradoxes have been resolved within the new field of paraconsistent mathematics. The paper argues that the vicious reflexivity apparent in the social sciences can be resolved by a similar move. An outline of the paraconsistent mathematics framework adequate for the modelling of social science reflexivities is presented and discussed.