David E. Allen

The pecking order hypothesis: Australian evidence

This paper investigates the pecking order hypothesis, as previously suggested by Donaldson (1961) and further developed by Myers and Majluf (1984). It utilizes accounting information for a sample of 89 listed Australian industrial and commercial companies drawn from the Australian Graduate School of Management CRIF File for the period 1954–82. The pecking order theory suggests that companies display a hierarchy of preferences with respect to funding sources. This is the result of the existence of asymmetric information. Management is assumed to know more about the firms value than potential investors. This may cause firms to refuse to issue stock, and they may, therefore, pass up valuable investment opportunities. In these circumstances, companies will prefer to fund by retentions; they will avoid new equity issues and their borrowing will be determined as a residual between desired investment and the supply of retained earnings. To avoid passing up favourable investment opportunities they will maintain ...

The long-run gains from international equity diversification: Australian evidence from cointegration tests

The benefits available from international equity diversification to Australian investors for the period 1970–92 are analysed using monthly index data for 16 countries supplied by Morgan Stanley Capital International. The cointegration framework is utilized and results from the standard Engle—Granger two-step ordinary least squares procedure are compared with those from the Johansen (1988) maximum likelihood procedure. It is found that, as in other recent work (Taylor and Tonks, 1989; Andrade, Clare and Thomas, 1991), the two techniques lead to different conclusions in certain cases. It is also found that, as in Kasa (1992), there is evidence of cointegration among a subset of the indices considered. A further finding of interest to the applied worker is that the results in the Johansen procedure are sensitive to the VAR specification and we believe that Halls (1991) warning regarding the reporting of tests from this procedure is valid.

Experts' estimates of task durations in software development projects

Abstract This paper reports a case study of how accurate were experts subjective estimates of the durations of tasks in a software project. The data available included the estimated task durations given by experts and the subsequent actual duration times. By looking at the results of the case study, the paper shows that although the majority of tasks are overestimated, the mean error is an underestimate of about 1%. The experts however could do even better by taking more cognisance of the number of subtasks that make up a task and hence use the WBS at a lower level when they are estimating durations.

A Test of the Persistence in the Performance of UK Managed Funds

We employ a United Kingdom data set of weekly returns from a sample of investment trust companies available on the Datastream database. We analyse the relative performance of the funds and determine whether a good (above-median), past-performance is indicative of future performance. Our study focuses on within sample relative performance. We examine persistence in performance in the short and long run based on a number of tests. Overall we find that both raw and risk-adjusted returns exhibit evidence of persistence in performance in the long run but not in the very short run. Copyright Blackwell Publishers Ltd 1999.

A Hidden Markov Chain Model for the Term Structure of Bond Credit Risk Spreads

This paper provides a Markov chain model for the term structure and credit risk spreads of bond prices. It allows dependency between the stochastic process modeling the interest rate and the Markov chain process describing changes in the credit rating of the bonds by their mutual dependency on a hidden Markov chain, which can be thought of as describing the underlying economic conditions. The model also allows a new interpretation of risk premia used in previous approaches and also uses a linear programming approach to strip the bonds of their coupons in such a way as to guarantee there is no mispricing.

Transitional credit modelling and its relationship to market value at risk: an Australian sectoral perspective

Internal credit risk modelling is important for banks for the calculation of capital adequacy in terms of the Basel Accords, and for the management of sectoral exposure. We examine Credit Value at Risk (VaR), Conditional Credit Value at Risk (Credit CVaR) and the relationship between market and credit risk. Significant association is found between different Credit CVaR methods, and between market and credit risk. Simpler Credit CVaR methods are found to be viable alternatives to more complex methodology. The relationship between market and credit risk is used to develop a new model that allows banks to incorporate industry risk into transition modelling, without macroeconomic analysis.

Investigating other leading indicators influencing Australian domestic tourism demand

In the tourism demand literature, much of the research focuses on income and price variables as demand determinants for travel. Nevertheless, the literature has neglected other possible indicators such as consumers perceptions of the future course of the economy, household debt and the number of hours worked in paid jobs. In fact, several studies found that these indicators could influence consumers in making decisions to travel. In this paper, we examine whether there are other indicators that can influence future Australian domestic tourism demand. The econometric model used in this study is a panel three-stage least squares (3SLS) model. Using the data on Australian domestic tourism demand, the empirical results reveal several points: first, it is found that the consumer sentiment index has significant impacts on VFR, but not on holiday tourism. Furthermore, the business confidence index has no influence on business tourism demand. The study also finds that an increase in household debt could encourage more Australians to travel domestically, indicating that Australians may consider increasing debt as their confidence to spend increases. Lastly, working hours have a statistically significant effect in the case of holiday tourism data.

The Fluctuating Default Risk of Australian Banks

Australian banks are widely considered to have fared far better during the Global Financial Crisis than their global counterparts, continuing to display solid earnings, good capitalization and strong credit ratings. Nonetheless, Australian banks experienced significant deterioration in the market values of assets. We use the KMV/Merton structural methodology, which incorporates market asset values, to examine default probabilities of Australian banks, making extensive international comparisons. We also modify the model to incorporate conditional probability of default, which measures extreme credit risk. We find that, during the Global Financial Crisis, based on extreme asset value fluctuations, Australian bank default probabilities fare only slightly better than their global counterparts. JEL Classification: G01, G21, G28

Modelling interstate tourism demand in Australia: A cointegration approach

Interstate tourism is an important component of the domestic tourism business in Australia. However, empirical analyses of interstate tourism demand have not been previously undertaken. The motivation for this paper is to investigate the short- and long-run causal relationships between economic factors and interstate tourism demand in Australia. Using a cointegration approach, this study discovers two distinct results. First, Australian household income, accommodation prices, prices of recreation and restaurants, and domestic airfares have significant impacts on the demand in the short-run. Second, some of the long-run economic coefficients show incorrect signs, which contradict the theory of consumer demand.

Comparison of alternative ACD models via density and interval forecasts: Evidence from the Australian stock market

In this paper a number of alternative autoregressive conditional duration (ACD) models are compared using a sample of data for three major companies traded on the Australian Stock Exchange. The comparison is performed by employing the methodology for evaluating density and interval forecasts, developed by Diebold et al. [F. Diebold, A. Gunther, S. Tay, Evaluating density forecasts with applications to financial risk management, International Economic Review 39 (1998) 863-883] and Christoffersen [P. Christoffersen, Evaluating interval forecasts, International Economic Review 39 (1998) 841-862], respectively. Our main finding is that the generalized gamma and log-normal distributions for the error terms have similar performance and perform better that the exponential and Weibull distributions. Additionally, there seems to be no substantial difference between the standard ACD specification of Engle and Russel [R. Engle, J. Russell, Autoregressive conditional duration: a new model for irregularly-spaced transaction data, Econometrica 66 (1998) 1127-1162] and the log-ACD specification of Bauwens and Giot [L. Bauwens, P. Giot, The logarithmic ACD model: an application to the bid-ask quote process of three NYSE stocks, Annales dEconomie et de Statistique 60 (2000) 117-150].