Konstantinos Kassimatis

Financial liberalization and stock market volatility in selected developing countries

This study empirically investigates whether stock market volatility increased following financial liberalization, in six ‘emerging’ markets. The sample countries are Argentina, India, Pakistan, Philippines, South Korea and Taiwan. To examine the issue, the news impact curves are utilized which relate current volatility to past news. The news impact curves are derived from the parameters of EGARCH models which measure the conditional volatility of stock returns in the sample markets. The results suggest that volatility fell after important liberalization policies were implemented.

Size, Book to Market and Momentum Effects in the Australian Stock Market

We examine the significance of the size, book-to-market and momentum risk factors in explaining portfolio returns in the Australian stock market. We compare the CAPM to a four-factor model assuming static risk premia, and find that the additional factors have significant explanatory power. Under the assumption of time-varying factor loadings, though, the significance of the three additional factors becomes marginal, which suggests that size, book-to-market and momentum may proxy for misspecified market risk.

Short-term overreaction, underreaction and efficient reaction: evidence from the London Stock Exchange

We examine short-term investor reaction to extreme events in the UK equity market for the period 1989 to 2004 and find that the market reaction to shocks for large capitalization stock portfolios is consistent with the Efficient Market Hypothesis, i.e. all information appears to be incorporated in prices on the same day. However, for medium and small capitalization stock portfolios our results indicate significant underreaction to both positive and negative shocks for many days subsequent to a shock. Furthermore, the underreaction is not explained by risk factors (e.g. Fama and French, 1996) calendar effects, bid-ask biases or unique global financial crises.

Making inefficient market indices efficient

The concept of efficient portfolios plays an important role in modern financial theory and practice. Although there is an extensive and growing literature that focuses on testing portfolio efficiency, outside of mean-variance optimization, which has several serious shortcomings, no systematic methodology for building efficient portfolios from inefficient indices has been developed. This paper addresses this issue. It uses the concept of Marginal Conditional Stochastic Dominance and a generalization of the 50% Portfolio Rule to develop a tractable and parsimonious methodology for constructing an efficient portfolio from a given, inefficient index. Because the Stochastic Dominance (SD) approach considers the entire probability distributions of asset returns, the resulting portfolios are efficient with respect to all risk-averse, non-satiable investors regardless of the form of their utility functions or the distributions of asset returns.

Size and Momentum in European Equity Markets: Empirical Findings from Varying Beta Capital Asset Pricing Model

We use securities listed on 13 European equity markets to form size and momentum portfolios. We find limited evidence of a size premium but significant momentum returns in eight sample markets. We find that these premia may not constitute an anomaly because they are consistent with a varying-beta Capital Asset Pricing Model. We also show that systematic risk is related to the business cycle. Furthermore, the results suggest that although size and especially momentum returns are significant, it would be difficult to exploit them in the short to medium run, because they are positive and sizeable in very few years in our sample.

Risk Aversion with Local Risk Seeking and Stock Returns: Evidence from the UK Market

Post and Levy (2005) find that investors are risk averse for losses and risk seekers for gains and that stocks which exhibit low risk in bear markets and high potential for gains in bull markets may demand a premium. The present study examines if this type of risk preference creates a premium in UK stock prices using a third-degree stochastic dominance test. We find that an arbitrage portfolio long on stocks with low past downside risk in bear markets and high past upside potential in bull markets and short on stocks with high past downside risk in bear markets and low past upside potential in bull markets generates a premium of 2.89% per month. This premium cannot be explained by the CAPM or the Fama and French 4-factor model, but it exhibits significant similarities to the momentum premium.

Constructing and Testing the 'World Market Portfolio' for Dollar Based Investors

We propose a theoretical framework for constructing a market proxy that corresponds to the “market portfolio” of financial theory. We construct this proxy, analyze its determinants and test its efficiency and explanatory power over the period 1974-2003 with respect to the return generating processes of a broad asset universe. We show that its major determinants are traded assets and, although it is not efficient, it contains significant incremental information for explaining asset returns beyond what is available in traded asset prices and that the significance of this information is robust with respect to the Fama-French (1992) model for stocks.

Index Tracking with Utility Enhanced Weighting

Passive index investing involves investing in a fund that replicates a market index. Enhanced indexation uses the returns of an index as a reference point and aims at outperforming this index. The motivation behind enhanced indexing is that the indices and portfolios available to academics and practitioners for asset pricing and benchmarking are generally inefficient and, thus, susceptible to enhancement. In this paper we propose a novel technique based on the concept of cumulative utility area ratios and the Analytic Hierarchy Process (AHP) to construct enhanced indices from the DJIA and S&P500. Four main conclusions are forthcoming. First, the technique, called the utility enhanced tracking technique (UETT), is computationally parsimonious and applicable for all return distributions. Second, if desired, cardinality constraints are simple and computationally parsimonious. Third, the technique requires only infrequent rebalancing, monthly at the most. Finally, the UETT portfolios generate consistently higher out-of-sample utility profiles and after-cost returns for the fully enhanced portfolios as well as for the enhanced portfolios adjusted for cardinality constraints. These results are robust to varying market conditions and a range of utility functions.

International Equity Flows, Dominant Distributions and Diversification

The weak empirical evidence linking diversification and international equity flows calls into question the diversification paradigm at the international level and the analytical framework it implies. Using a novel measure of diversification that includes all the moments of the distribution of equity returns rather than just the first two, this paper reexamines the role that diversification opportunities play in the determination of international equity flows. Using the concept of Marginal Conditional Stochastic Dominance (MCSD) to estimate the diversification opportunities, it provides strong evidence that diversification opportunities are significant determinants of international equity flows and that these opportunities are concentrated on the dominant distributions, thereby implying a tendency towards MCSD efficiency. It also shows that the relationship between diversification opportunities and equity flows is much stronger for developed markets than for emerging markets. These results are robust with respect to a range of conventional control variables documented in the outstanding literature.

Abnormal Short-Term Returns Following Market-Moving Events in the International Government Bond Market

We examine short-run patterns in government bond returns after market-moving events. Our sample covers government bond series from 17 developed countries. We find that abnormal returns follow momentum for about two weeks following an event and then reverse for a period of up to 60 days after the event. This pattern is the same for positive and negative events. However, we find that the potential to generate abnormal trading profits based on these patterns is limited.