Stephen A. Easton

An investigation of the robustness of the day-of-the-week effect in Australia

The present study analyses the robustness of the day-of-the-week effect in Australia. The results show that sample size can distort the interpretation of classical test statistics unless the significance level is adjusted downward. After providing for sample size adjustment, the evidence of a day-of-the-week in Australia is considerably weakened. Further, error distribution specification tests also reveal widespread depar-tures-from ordinary least squares (OLS) assumptions. However, tests conducted using robust techniques that are insensitive to the failure of maintained assumptions provide evidence of a day-of-the-week effect which is very similar to the evidence from OLS regressions. This contrasts with Connolly (1989) who found that the evidence of the day-of-the-week effect in the US market was considerably diminished by the application of these techniques. Robust statistical techniques also show that the Australian day-of-the-week effect is independent of the US day-of-the-week effect.

The Efficiency of Australian Football Betting Markets

This paper examines the efficiency of the two major Australian football betting markets: the Australian Rugby League (ARL) FootyTAB market and the Australian Football League (AFL) Footywin market. Probit and ordered probit models are tailored to the unique structures of the markets. This circumvents some potential econometric problems, and also allows us to test betting strategies in which a bet is placed only when there is a high ex‐ante probability of success. Our probit models are successful in predicting game outcomes in both the ARL and AFL. While several of our betting strategies generate significant profits, both in‐sample and out‐of‐sample, we offer a number of reasons why we are cautious about interpreting these results as conclusive evidence of market inefficiency.

A refutation of the existence of the other January effect

Cooper et al. report US evidence of the other January effect, where returns in January are shown to have predictive power for returns over the subsequent 11 months. We re-examine the latest sub-period that they examine and find that the results using excess returns are not unique to January and that the effect for January is not apparent for raw returns. Further, using excess (raw) return data for 38 (44) other countries, limited support is found for the other January effect, with eight (five) of the remaining 11 months demonstrating a statistically significant effect in at least as many countries as exhibited the other January effect. Further, there is no evidence to suggest that different tax-year ends across countries can explain the result.

Asset Tangibility, Industry Representation and the Cross Section of Equity Returns

Recent theory relates expected returns and covariant risk to the investment decisions of a firm across certain stages of the business cycle. Using the Australian accounting environment that provides a wider scope for the capitalisation of intangible assets compared with the United States, this paper tests the relationship between asset tangibility and returns within the Fama and MacBeth (1973) framework. A relationship is found to exist between asset tangibility and the cross-section of equity returns. This relationship is most evident in the materials industry, which is characterised by irreversible, firm-specific assets. These results persist after controlling for firm characteristics that Fama and French (1992) show are related to returns, although the effect is largely driven by microcap stocks.

Tangibility and investment irreversibility in asset pricing

Zhang (2005) and Cooper (2006) provide a theoretical risk-based explanation for the value premium by suggesting a nexus between firms’ book-to-market ratio and investment irreversibility. They argue that unproductive physical capacity is costly in contracting conditions but provides growth opportunities during economic expansions, resulting in covariant risk between firms’ investment in tangible assets and market-wide returns. This article uses the Australian accounting environment to empirically test this theory – a test that is not possible using US data. Consistent with the theoretical argument, tangibility is priced in equity returns, and augmenting the Fama and French three-factor model with a tangibility factor increases model explanatory power.

Old volatility - ARCH effects in 19th century consol data

Engles autoregressive conditional heteroscedasticity (ARCH) model has been used successfully to model volatility in modern financial data. Here the returns on 3% Consols traded on the London market from 1821 to 1860 are examined for timevarying conditional heteroscedasticity. The series contains over 10,000 daily price changes. The analysis produces strong evidence for persistent ARCH effects in the data. Structural changes in the model and periods of increased volatility can be linked to important political and historical events.

Returns to Equity Before and After Holidays: Australian Evidence and Tests of Plausible Hypotheses

There is evidence that mean equity returns in Australia (as in the U.S.) are positive before and after holidays. Two distinctively Australian features are used to examine this regularity. First, the Australian market is dominated by two exchanges of approximately equal importance. Returns on each exchange before and after days on which only one of the exchanges was closed were examined. Returns preceding the closure were significantly higher on the closed exchange. Second, Australian holidays vary from one to five days. A positive association was found between returns before and after holidays, and holiday duration. These findings support settlement procedure and calendar time hypotheses.

Empirical Evidence on Put-Call Parity in Australia: A Reconciliation and Further Evidence

The results of the put-call parity studies by Loudon (1988) and Taylor (1990) are in direct conflict despite the authors reporting the use of virtually identical models and methods. Employing an improved version of Taylors data collection procedures, we test the parity theorem in the period studied by Loudon. The results are similar to those of Loudon. As a result, we run separate checks of Taylors data and analysis. The check of the data reveals that over sixty per cent of Taylors observations are invalid. The check of the analysis reveals that the lower boundary of the put-call parity relation was incorrectly calculated by Taylor. Correcting this error results in fundamentally different conclusions.

Non-simultaneity and Apparent Option Mispricing in Tests of Put-Call Parity

Transaction costs have been offered as the most likely explanation for apparent mispricing found in recent studies of the Australian options market. This paper suggests that another feature of the market, namely non-simultaneity between option prices and the price of the underlying share, offers a more powerful explanation. It is demonstrated that the types of violations of put-call parity that have been observed in Australia are the types of violations that are to be expected when non-simultaneity is present. It is shown that apparent mispricing in tests of put-call parity will, in the presence of non-simultaneity, be greater for short-term options. Conversely, mispricing will be less for options which are at-the-money, and when the risk-free rate of interest is high. Non-simultaneity is likely to result in put options appearing to be undervalued relative to call options and the underlying share.

Market efficiency and continuous information arrival: evidence from prediction markets

Two regularities in financial economics are that prices underreact to news events and that they display short term momentum. This article tests for the presence of these regularities in prediction markets offered by the betting exchange Betfair on the 2008 Ryder Cup Golf Competition. Betfair offered in play prediction markets on the individual match play pairings and on the Cup result, with trading being virtually continuous in all markets. Modelled probabilities of the Cup result were updated continuously using trades in the individual match play pairings. These probabilities were then compared with the probabilities of the Cup result implied by odds in that market. The odds in the market for the Cup result underreact to both good and bad news that is provided by changes in the odds in the markets for the individual pairings. Further, these modelled probabilities Granger cause changes in the probabilities of the Cup result implied by odds in the market on that outcome. In addition, economically and statistically significant evidence of momentum is found in the odds in the market on the Cup result.