Jamie Alcock

The Determinants of Debt Maturity in Australian Firms

We examine the determinants of debt maturity in the Australian capital market with the Top 400 firms listed on the Australian Securities Exchange for the period 1989–2006. We find that Australian firms not only exhibit a positive leverage–maturity relationship but also use short-term debt to signal their high quality to the market. Our results are robust to different estimation methods that control for endogeneity and error-dependence. We also find that ignoring the interaction between leverage and maturity can lead to erroneous conclusions about the support for the matching principle, the agency costs hypothesis and the transaction costs hypothesis.

The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds

We study a unique data set in order to examine the performance of a sample of 169 global private equity real estate investment funds across the core, value-add and opportunistic investment style categories over the most recent property cycle (2001-2011). We employ a multi-factor asset pricing model to measure the impact on the funds’ total excess returns of the underlying real estate market, managerial skill measured by Jensen’s alpha, leverage and, for the first time, managerial skill as it relates to timing leverage decisions to anticipated future market trends. We find evidence consistent with the hypotheses that i) fund performance is almost directly proportional to the return on the underlying real estate market, ii) there is evidence for systematic underperformance as measured by Jensen’s alpha, possibly related to market frictions, iii) leverage cannot be viewed as a long-term strategy to enhance performance, and iv) timing leverage choices to the expected future market environment does not appear to add significantly to fund excess returns.

Portfolio Construction Incorporating Asymmetric Dependence Structures: A User's Guide

We outline a method of portfolio selection incorporating asymmetric dependency structures using copula functions. Assuming normally distributed marginal returns, we illustrate how asymmetric return correlations affect the efficient frontier and subsequent portfolio performance under a dynamic rebalancing framework. Implementing this methodology within the context of tactically allocating a small set of market indices, we demonstrate several key findings. First, we establish the manner by which the efficient frontier constructed under asymmetric dependence differs from a mean-variance frontier. By establishing a paper portfolio based on these differences, we find that asymmetric correlation structures do have real economic value. The primary source of this economic value is the ability to better protect portfolio value and reduce the size of any erosion in return relative to the normal portfolio when asymmetric return correlations are accounted for.

A genetic estimation algorithm for parameters of stochastic ordinary differential equations

A generic method for the estimation of parameters for Stochastic Ordinary Differential Equations (SODEs) is introduced and developed. This algorithm, called the GePERs method, utilises a genetic optimisation algorithm to minimise a stochastic objective function based on the Kolmogorov-Smirnov statistic. Numerical simulations are utilised to form the KS statistic. Further, the examination of some of the factors that improve the precision of the estimates is conducted. This method is used to estimate parameters of diffusion equations and jump-diffusion equations. It is also applied to the problem of model selection for the Queensland electricity market

A simulation analysis of the market effect of the Australian Broadcasting Corporation

In this paper we utilise a stochastic address model of broadcast oligopoly markets to analyse the Australian broadcast television market. In particular, we examine the effect of the presence of a single government market participant in this market. An examination of the dynamics of the simulations demonstrates that the presence of a government market participant can simultaneously generate positive outcomes for viewers as well as for other market suppliers. Further examination of simulation dynamics indicates that privatisation of the government market participant results in reduced viewer choice and diversity. We also demonstrate that additional private market participants would not result in significant benefits to viewers.

Volatile earnings growth, the price of earnings and the Value premium

There is little disagreement in the literature that the price of an asset is related to at least two things: the current earnings of the asset, and the anticipated growth of these earnings. In most valuation models, fair price is highly sensitive to future growth estimates – a result often confirmed empirically. Fama and French (1992, 1993, 1998) note the importance of growth on the valuation of assets by demonstrating that ‘value’ firms (having low future growth opportunities) obtain relatively higher risk-adjusted returns than ‘growth’ assets (considered to have high future growth opportunities). The Fama and French result, along with the research it has spawned, suggests that the relationship between growth and price is not yet clearly understood. In this article we further explore the relationship between price and earnings by investigating the role played by higher-order growth terms. Specifically, we examine how the volatility of future earnings growth affects the price of those earnings and whether this relationship provides any insight into the Fama–French ‘Value’ premium. The value of future growth is unobservable and, as Easton (2006, p. 659) comments, ‘the literature provides little guidance as to the appropriateness of any particular assumed rate of growth’. Easton also suggests two approaches for estimating growth: (1) assuming an estimate for earnings growth as a proxy for real GDP growth, and (2) simultaneous estimation of the cost of equity and the long-term growth rate. Damodaran (2002) illustrates the second approach with the estimator

The Interrelationships between REIT Capital Structure and Investment

We explore the interdependence of investment and financing choices in US listed Real Estate Investment Trusts (REITs) in the period 1973–2011. We find that the investment and financing choices of REITs are interdependent, but they are not made simultaneously. Our results suggest that investment determines leverage, but leverage has no apparent effect on investment decisions. Conversely, the debt-overhang conflict between shareholders and debt holders that theoretically drives the reverse influence of leverage on investment policy does not appear to filter through to the actual investment choices of REITs. Rather, we find that REIT managers utilize the maturity dimension of capital structure to mitigate potential investment distortions and ensure that investment remains on its value-maximizing path. We also present novel evidence on the role of investments in driving a wedge between REIT target leverage and actual leverage levels, and on the interplay between investments and leverage adjustments toward the target ratio in explaining REIT capital structure dynamics.

Unexpected Inflation, Capital Structure, and Real Risk-adjusted Firm Performance: Capital Structure and Real Performance

Managers can improve real risk‐adjusted firm performance by matching nominal assets with nominal liabilities, thereby reducing the sensitivity of real risk‐adjusted returns to unexpected inflation. The net asset value of US equity real estate investment trusts (REITs) serves as a good proxy for nominal assets and, accordingly, we use a sample of US REITs to test our hypothesis. We find that for the firms in our sample: (i) their real risk‐adjusted performance, and (ii) their inflation‐hedging qualities are inversely related to deviations from this ‘matching‐nominals’ argument. In addition to providing managers with a vehicle to maximize real risk‐adjusted performance, our findings also provide investors with the tools to infer inflation‐hedging qualities of equity investments.

Unexpected inflation, capital structure and real risk-adjusted firm performance

Managers can improve real risk-adjusted firm performance by matching nominal assets with nominal liabilities, thereby reducing the sensitivity of real risk-adjusted returns to unexpected inflation. The net asset value of US equity real estate investment trusts (REITs) serves as a good proxy for nominal assets and, accordingly, we use a sample of US REITs to test our hypothesis. We find that for the firms in our sample: (i) their real risk-adjusted performance, and (ii) their inflation-hedging qualities are inversely related to deviations from this ‘matching-nominals’ argument. In addition to providing managers with a vehicle to maximize real risk-adjusted performance, our findings also provide investors with the tools to infer inflation-hedging qualities of equity investments.

Non-parametric American option valuation using Cressie–Read divergences

In this paper we build on the possibility that the use of the Cressie–Read family with the non-parametic method for valuing European option might be extended to non-parametric valuation of American options. We derive a suite of non-parametric methods to price and hedge American-style options, utilising the Cressie-Read family of divergences. We test the efficacy of these methods using a large sample of traded American-style options struck on the S&P100 index. We find that in general, our suite of non-parametric valuation schemes generate more accurate price estimates than traditional parametric schemes, especially for longer-dated options.