Suzanne Fifield

An analysis of trading strategies in eleven European stock markets

Abstract In recent years, the validity of the weak form efficient market hypothesis (EMH) has been called into question as several studies have uncovered evidence that technical trading rules have predictive ability with respect to both developed and emerging stock market indices. This study analyses the forecasting power of 2 of the most popular trading rules using index data for a selection of 11 European stock markets over the January 1991 to December 2000 period. The findings indicate that the emerging markets included in this paper are informationally inefficient; these markets displayed some degree of predictability in their share returns, although the developed markets did not. Furthermore, the results point to large differences in the performance of the rules examined; while small size filters consistently outperformed the buy-and-hold strategy in the emerging markets examined even after the consideration of transaction costs, the performance of the moving average rules was erratic and varied dramatically from market to market.

The appraisal of equity investments by Nigerian investors

Purpose - The purpose of this paper is to examine how investors and stockbrokers in Nigeria value shares and whether their approach to share valuation differs from that documented in other countries. In particular, the paper investigates whether the investors and stockbrokers use fundamental, technical and/or risk analysis differently to appraise investments. The information which investors and stockbrokers employ for share valuation purposes is also considered to see whether differences from developed market countries exist. Design/methodology/approach - A series of semi-structured interviews was conducted with eight stockbrokers and ten investors from Nigeria. Findings - The main approach to share valuation employed by the Nigerian interviewees was fundamental analysis; investors and brokers forecast earnings for a company and multiplied this prediction by a P/E ratio to estimate the intrinsic worth of a share. This intrinsic value was then compared with the current share price to see if the equity was under- or over-valued. Thus, Nigerian investors are similar to their counterparts in other countries in terms of the main approach to share valuation employed. Other company fundamentals considered in the valuation process included cash flows and dividend information. Technical and risk analyses were also undertaken to supplement any initial conclusions reached. Indeed, the findings suggest that there was a greater use of risk analysis by Nigerian investors in comparison to the results documented for other countries. Company financial statements and stockbroker reports were the main sources of information used by investors although qualitative information, such as that obtained from meetings with company executives, was also important. However, access to senior executives was not uniform across all interviewees. Practical implications - Investors and stockbrokers in Nigeria behave in a similar fashion to their counterparts in developed countries. However, political risk assumes a greater prominence in the equity valuation process within Nigeria; a reduction in this risk might help Nigerian equity values to increase. Originality/value - The paper reports the views of senior stockbrokers and investors in Nigeria. To date, most work in this area has focused on developed markets; the current paper considers the case for an emerging market which is important in Africa. This market plays an important role in furthering the economic aims of the Government via their privitisation programmes. In addition, the market is attracting the attention of foreign investors who wish to invest in Nigerian equities.

The performance of moving average rules in emerging stock markets

The question of whether active trading strategies outperform the more naïve approaches that are available to investors has returned to the research agenda. The topic had been hotly debated in the early and middle 1960s, but seemed to have been dispatched to the academic sidelines by proponents of the Efficient Market Hypothesis (EMH). However, the developments in behavioural finance which recognize that individuals may make mistakes when valuing securities have revived interest in this topic. In addition, recent evidence has re-ignited the debate and there is now a new strand of literature which re-examines whether trading strategies based on historic information can yield profits. The current article builds on this recent body of evidence by examining moving average rules for 15 emerging and three developed markets over the period 1989–2003. The results indicate that the return behaviour of the emerging markets studied differed markedly from that of their developed market counterparts; moving average rules were more profitable when tested using emerging stock market indices. In addition, this profitability persisted for longer moving averages, suggesting that trends in share returns were larger and more persistent in emerging markets.

Investment in Central and Eastern European equities: An investigation of the practices and viewpoints of practitioners

Purpose - The purpose of this paper is to examine the issues faced by institutional investors looking to invest in the Central and Eastern European (CEE) region. In particular, the paper seeks to ascertain the views of practitioners on the reasons for undertaking CEE investment, the structures of their investment processes for the CEE region, the barriers to CEE investment, and the future of the CEE region. Design/methodology/approach - A series of semi-structured interviews was conducted with institutional investors who had substantial knowledge and experience of investing in the CEE region. Findings - The findings indicated that funds followed a bottom-up approach whereby they researched company fundamentals and then applied a macroeconomic overview in their decision. The risks considered were not those frequently discussed in the current literature. For example, while currency risk and political risk were not seen as problematic, interviewees were concerned with liquidity problems and corporate governance issues. Finally, investors thought that the economic growth of the CEE region, together with its convergence with the EU, would create a more attractive investment environment than that available in other emerging market regions. Originality/value - The paper addresses the more qualitative aspects of CEE investment decisions, such as perceptions about the risks of acquiring shares in CEE firms, by analysing practitioner perspectives on equity investment in the region. This qualitative approach facilitates an investigation of issues which cannot be captured in quantitative analyses.

A cross‐country analysis of IFRS reconciliation statements

Purpose - One of the most fundamental changes to affect financial reporting in recent years has been the introduction of International Financial Reporting Standards (IFRS). This paper aims to examine the nature of the Income Statement and Net Equity IFRS adjustments for a sample of companies from the UK, Ireland and Italy following the introduction of IFRS. Design/methodology/approach - A sample of IFRS Reconciliation Statements are examined to identify the most significant IFRS adjustments. Using an index of conservatism, these amounts are further analysed to assess their impact on the accounting numbers reported under previous national GAAP. Findings - For all three countries, the IFRS profit was greater than that reported under previous national GAAP. IFRS also had a significant effect on net worth; while UK and Italian companies experienced an increase in equity upon the adoption of IFRS, the Irish firms in the sample recorded a decrease. The analysis also indicated that the impact of IFRS on profit and net worth was primarily attributable to a few core standards including IFRS 2, IFRS 3, IFRS 5, IAS 10, IAS 12, IAS 16, IAS 17, IAS 19, IAS 38 and IAS 39. Practical implications - A multi-country perspective for future IFRS research is required as the impact of individual IFRS varies in importance from one country to another. Originality/value - By analysing the IFRS that have had a significant impact on accounting numbers prepared under previous national GAAP, opportunities for future research are identified.

Emerging stock markets: a more realistic assessment of the gains from diversification

Over the last decade, a number of studies have examined the costs and benefits from investing in equities traded on emerging stock markets (ESMs). The general conclusion to emerge from these studies is that investors have been able to improve portfolio performance significantly by including an emerging equity market component in investment portfolios. However, the ex-post framework utilized in past analyses potentially overstates the true level of gains which can be obtained from an emerging market diversification strategy; they are computed on the assumption that, with respect to the inputs to the portfolio decision, investors are blessed with perfect foresight. This paper attempts to overcome this problem by estimating the ex-ante gains available from investing in emerging stock markets. In particular, the paper investigates whether, by using a simple strategy based on historical data to forecast portfolio inputs, all of the gains which are available from ex-post analyses of diversification can be achieved in practice. The results obtained point overwhelmingly to the inadvisability of relying on historical data to identify ex-ante optimal emerging market portfolios; the strategies examined in this paper achieved very few of the gains attained in ex-post analyses of diversification.

Examining the nature of the gains from investment in the emerging stock markets of the Central and Eastern European region

This article examines the nature of any gains from investing in the emerging stock markets of Central and Eastern Europe using disaggregated data for 187 shares from eight stock exchanges over the period 1998 to 2003. The results suggest that gains exist; these gains are largest when diversification occurs across countries rather than via investment in different industries. However, the analysis also suggests that the returns earned by equities in these countries vary dramatically over time and, as such, may hamper the efforts of investors attempting to exploit this diversification ‘free lunch’.

The relationship between South Asian stock returns and macroeconomic variables

This article investigates whether economic variables have explanatory power for share returns in South Asian stock markets. In particular, using data for four South Asian emerging stock markets over the period 1998–2012, the article examines the influence of a selection of local, regional and global economic variables in explaining equity returns; most previous studies that have examined this issue have tended to focus on only local and/or global factors. Important factors are identified by distilling the macroeconomic variables into principal components. Economic activities, real interest rates, real exchange rates and the trade balance represent local factors. Regional factors are represented by interregional trade and regional economic activity while global factors are represented by world financial asset returns and world economic activity. The vector autoregression results suggest that the South Asian markets examined are not efficient. Both local and regional factors can directly and indirectly explain Bangladeshi, Pakistani and Sri Lankan stock returns while the lagged returns of the Pakistani stock market and world economic activity can explain Indian stock returns.

The management of interest rate risk: evidence from UK companies

Purpose – This paper aims to examine the interest rate risk management (IRRM) practices of UK‐listed companies. In particular, it examines the significance of interest rate risk (IRR) to these companies as well as the risk management practices adopted, including: the methods used to assess the level of IRR and the types of interest rate forecasts used in the process; derivatives activity; and corporate governance, reporting and control.Design/methodology/approach – A series of semi‐structured interviews was conducted with the treasurers of ten UK companies in order to provide an in‐depth analysis of IRRM.Findings – The results of this research suggest that IRR is important to UK companies and that their IRR hedging strategies are geared towards managing shareholder considerations and protecting banking covenants and corporate credit ratings. Moreover, companies rely extensively on financial derivatives to manage their IRR although their corporate governance practices relating to derivatives usage, in some...

The value relevance of financial instruments disclosure: evidence from Jordan

Purpose - The purpose of this paper is to: examine the value relevance of financial instruments disclosure (FID) provided by Jordanian listed companies under International Financial Reporting Standard (IFRS 7) as compared to that supplied under IAS 30/32; provide evidence about the value relevance of high vs low levels of FID; and investigate which components of FI-related information are more value relevant. Design/methodology/approach - A sample of 70 Jordanian listed companies is used in this monograph. A disclosure index checklist was constructed to measure FI information provided by the sample companies. In addition, a valuation model is employed to test the association between FID and market value. Findings - Although evidence is provided that FI information was value relevant over the two periods of investigation, the information supplied after the implementation of IFRS 7 was more strongly associated with market values. An analysis of the sub-components of FID reveals that the details about balance sheet, fair value and risk information matter when valuing equity. Overall, the results indicate that investors value FI-related information when making their equity pricing decisions. The result suggests that compliance with IFRS mandatory disclosure requirements does produce relevant financial statements. Research limitations/implications - The results of the current study have a number of implications for policy makers. First, they provide a great deal of insight for the IASB about the relevance of its standards to countries outside the western context. In addition, the findings provide valuable insights for policy makers in Jordan who are concerned about the implications of mandatory disclosures. Originality/value - The analysis of FID in developing countries in general, and in Jordan in particular, has been overlooked by the extant literature and therefore this study is the first of its kind to examine this research issue for a sample of Jordanian firms.