Lakshman Alles

An examination of return and volatility patterns on the Irish equity market

This study examines the pattern of returns and volatility on Irish equity markets, over a period when the markets were deregulated. GARCH and GARCH-IN-MEAN models are applied to data from three study periods. Volatility spillovers from the London stock market are considered, providing a test for evidence of a change in the degree of this influence. Within sample results show that GARCH models do provide a useful description of Irish equity returns. Furthermore, the inclusion of external volatility improves the model fit. There is no evidence that deregulation coincides with an alteration in the impact of external volatility. Forecast results indicate some evidence that the inclusion of external volatility spillovers does improve the forecast accuracy of GARCH models. Tests indicate that a GARCH-IN-MEAN specification does not suit Irish equity data.

The Determinants of Target Cash Holdings and Adjustment Speeds: An Empirical Analysis of Chinese Firms

This study examines the determinants of target cash reserves among publicly listed Chinese firms in the 1998 to 2009 period, and how actual levels of cash holdings adjust towards target cash reserves. The consistency of the determinants of cash reserves with the static trade-off, pecking order and the free cash flow theories, in so far as they relate to cash holdings of firms, are also evaluated. Results of the study support the existence of target cash reserves in Chinese firms, and that they are a function of a range of firm specific characteristics that include leverage, cash flow, dividend payout, liquidity, tangibility, investment opportunities, managerial ownership, and ownership concentration. Results further suggest that contrary to expectations, the adjustment speed towards target levels are quite rapid and similar to the adjustment speeds observed in longer established markets.

Non-Normality and Risk in Developing Asian Markets

This paper examines whether additional risk factors such as the variance, skewness, and coskewness of returns offer an appropriate explanation of company returns in less developed capital markets. Arguments for considering some additional factors in pricing models to better deal with such situations are presented. Using individual company returns from a range of developing Asian capital markets, empirical tests examine the importance of these extra risk factors. Results indicate that both individually and when in combination, variance and coskewness are significantly related to returns in these markets. Skewness is less consistently important. Robustness tests confirm that these measures tend not to capture size or book to market factors.

The cost of downside protection and the time diversification issue in South Asian stock markets

The objectives of this article are to carry out a comparative study of the costs of downside protection for investors in the stock markets of Bangladesh, India, Pakistan and Sri Lanka, and to investigate the time diversification issue in these markets by examining the variation of this cost as the investment horizon is extended. The cost of downside protection and time diversification effects are investigated by examining the properties of a protective put strategy and a capital protected equity participation strategy in each countrys stock market over investment horizons ranging from 1 to20 years. Long-horizon investment outcomes are generated using a bootstrapping technique. Results indicate that the cost of downside protection differs from one country to another, but there is a common pattern of the cost decreasing as the investment horizon lengthens. In overall terms, the pattern of decreasing protection costs at longer investment horizons is consistent with the notion of the time diversification benefits of investment risk.

The Asymptotics of Extreme Returns in the Australian Stock Market

Empirical analysis of financial data such as the daily, weekly or monthly prices of assets such as bonds, stocks, currencies and commodities have shown that asset prices approximately follow a martingale process, but the distribution of asset returns tend to be fat-tailed. This paper examines the extreme daily, weekly and monthly returns on the Australian stock market using order statistics and extreme value theory. Using data from the Australian Stock Exchange for the period 1990 to 2001 (11 years), the extreme returns are found to belong to a range of extremevalued family of distributions. The distribution of the underlying returns generating process is found to be conditional on the blocksizes used. The maximal and minimal returns have differing distributions and are correlated indicating a possible bivariate returns generating process. Further, extreme returns are found to be weakly correlated implicating possible volatility clustering of the extreme returns.

An examination of causality and predictability between Australian domestic and offshore interest rates

Abstract This paper studies the causality and predictability between Australian domestic and offshore short term interest rates in both the first and second moments during the period 1987 to 1996. Causality flow is observed to be stronger from the domestic to the offshore market in the earlier sub periods but characterised by significant two-way causality flow in the latter sub-periods. Volatility tests show that the volatility in one market spills over to the other market simultaneously, which is consistent with Australian markets being well integrated with global markets. The predictability across the two markets in the first moments is examined through an error correction model, whose forecasting performance is assessed relative to a benchmark random walk model. To test the predictability of volatility, four different models are compared: A GARCH model, A GARCH model incorporating contemporaneous spillover effects, a GARCH model with lagged spillover effects, and a benchmark random walk model. Results indicate that the error correction model and the GARCH model with contemporaneous volatility spillover are the superior models for forecasting changes in interest rates and for forecasting volatility, respectively.

Futures and Forward Price Differential and the Effect of Marking-to-Market: Australian Evidence

The objective of this paper is to examine the effects of marking-to-market of futures contracts on the price differential between futures and forward contracts based on the predictions of the Cox, Ingersoll and Ross (1981) (CIR) model. Cox et al., (1981) derive a series of propositions with respect to the relationship between futures and forward prices and a set of testable implications. These are tested empirically in this paper using Australian data from November 1991 to June 1997. The results provide evidence of the presence of significant futures and forward price differences, where the futures price is consistently below the forward price. Only partial support is found for the Cox et al., (1981) propositions, implying that the effect of marking-to-market is not able to fully account for the price differential. Therefore, it is not possible to rule out the influence of other institutional factors on the futures-forward price difference.

Asset pricing and downside risk in the Australian share market

ABSTRACT As downside risk has been identified as a separate risk exposure to investors, we investigate whether downside beta and co-skewness exposure impact on the return to investors in Australian equities. Although considered as a developed market, the Australian Securities Exchange merits separate investigation, as it is small and concentrated on some sectors, when compared with the major developed markets. As realized returns are a proxy for expected returns, we separately examine conditional returns in upturn and downturn periods. We find that both downside risks are separately priced by investors, and that our results are unaffected by the inclusion of a range of company characteristics. We subsequently confirm that returns to each downside risk are not related. In robustness tests, we conclude that the return to downside risk cannot be explained by a size, a value, or a momentum premium. Although it also has explanatory power, the inclusion of a leverage factor also does not reduce the explanatory power of downside risk.

The information on inflation in the Australian term structure

In this paper we examine the information on inflation contained in the term spread of the Australian term structure in a model in which we allow the expected real term spread to vary with time. Previously, Mishkin (1990) assumed a constant expected real term spread in a similar inflation forecasting model. We further extend the model by allowing the coefficient of the nominal yield spread also to vary with time. Results show that the model based on the time-varying expected real rate, estimated with the Kalman filter, is more suitable than the model based on the constant real rate. Also, the term spread lagged one period has more information on future inflation than the contemporaneous term. Finally, the forecasting power of a model with a randomly time-varying yield spread is inferior to the other versions examined.

Sustainable Withdrawal Rates During Retirement and the Risks of Financial Ruin

This paper describes the application of two different techniques for measuring sustainable withdrawal rates during retirement and the associated risks in running out of funds in the retirement savings pool. The first is a bootstrap simulation approach using recent Australian equity and bond market data. The second is a simulation-free analytical approach proposed in Milevsky and Robinson (2005). To illustrate, we compute and compare the probabilities of financial ruin for a retiree with a thirty year retirement horizon for some commonly recommended periodic withdrawal rates.