Tim Brailsford

Agency Problems and Capital Expenditure Announcements

This article examines the market valuation of announcements of new capital expenditure. Prior research suggests that the firms growth opportunities and cash flow position condition the market response. This study jointly examines the role of growth and cash flow, and the interaction between them. Using a new data set of Australian firms that avoids problems associated with expectations models, the results are remarkably strong and support a positive association between growth opportunities and the market valuation, in addition to supporting the role of free cash flow. The findings have implications for the relationship between general investment information and stock prices.

Size and Book-to-Market Factors in Australia

There is continuing debate in the asset-pricing literature as to the acceptance of the Fama–French three-factor model. While this model has received strong empirical support from tests in the US equity market, tests of the model in the Australian market have yielded inconclusive findings, particularly in respect of the high-minus-low factor. Prior research in Australia has suffered from limited datasets in respect of the accounting variables, and previous results vary with the scope of the dataset employed. Our study provides two advances. Firstly, the study utilizes a purpose-built dataset spanning 25 years and 98% of all listed firms. Secondly, the study employs a more appropriate portfolio construction method than that employed in prior studies. With these advances, the study is more able to test the three-factor model against the capital asset-pricing model (CAPM). The findings support the superiority of the Fama–French model, and for the first time align the research in this area between Australia and the USA.

Disentangling Size from Momentum in Australian Stock Returns

Prior evidence concerning momentum in Australian equity returns has produced inconsistent results. This study examines the interaction between momentum and firm size. Specifically, we report that momentum returns are significant only for larger portfolios, and that this finding explains the inconsistent results of prior research. We demonstrate that momentum is present only in the top 500 stocks, and is most economically significant among the mid-cap stocks, which we call a relative size effect. However, the momentum returns are primarily generated from poor performance of the loser portfolio rather than any superior performance of the winner portfolio. In a more formal examination of the impact of size, we find significant exposure to a size factor among the combinations of size and performance portfolios. The strongest exposure to the size factor is found in small loser portfolios which also have the strongest exposure to market risk. In explaining the source of momentum returns, our findings cast doubt on the practical implementation of a trading strategy, and we suggest that successful momentum trading strategies are likely to realize ‘paper’ profits rather than generate real investment returns.

Selecting the Forgetting Factor in Subset Autoregressive Modelling

Conventional methods to determine the forgetting factors in autoregressive (AR) models are mostly based on arbitrary or personal choices. In this paper, we present two procedures which can be used to select the forgetting factor in subset AR modelling. The first procedure uses the bootstrap to determine the value of a fixed forgetting factor. The second procedure starts from this base and applies the time-recursive maximum likelihood estimation to a variable forgetting factor. In one illustration using real exchange rates, we demonstrate the effect of the forgetting factor in subset AR modelling on forecasting of non-stationary time series. In a second illustration, these two procedures are applied to time-update forecasts for a stock market index. Subset AR models not including a forgetting factor act as a set of benchmarks for assessing ex ante forecasting performance, and consistently improved forecasting performance is demonstrated for these proposed procedures. ex ante

The historical equity risk premium in Australia: Post-GFC and 128 years of data

We present an updated set of estimates of the historical equity risk premium in Australia covering the 128 calendar years from January 1883 to December 2010. Relative to bonds (bills), the observed equity premium has averaged 6.1 per cent (6.5 per cent) p.a. over this period, and we report a similar number for later periods of relatively good quality data. We also provide estimates that incorporate an adjustment for distributed imputation credits and include the annual time series of data relating to each of the underlying components – stock, bill and bond returns and inflation.

The impact of terrorism on global equity market integration

In this paper we investigate the short-term contagion and long-term integration effects of terrorist activity on national stock markets. Using the partially integrated model of Bekaert et al. (Bekaert G, Harvey C and Ng A (2005) Market integration and contagion. Journal of Business 78: 39–69), we examine whether changes in cross-border relationships surrounding recent terrorist events are caused by changes in exposure to common risk factors and investigate whether these findings are similar across both developed and emerging market securities. Our research concludes that terrorism induces substantial contagion and market integration effects on national equity markets. Specifically, we provide strong evidence that major terrorist attacks induce substantial contagion consequences, particularly for developed nation equity markets. In terms of longer-term integration effects, a strong increase in cross-market correlation is observed from the pre to post-9/11 period. However, we find little evidence of an increase in the risk exposures of national markets to common risk factors, suggesting that this heightened correlation is driven by an increase in global risk factor uncertainty. This finding is consistent with the argument that an increase in the risk aversion of market participants is associated with terrorist attacks.

Pricing Bonds in the Australian Market

This paper provides an examination of term structure models in the Australian bond market. Specifically, we examine the comparative ability of various models to forecast at the short, medium and long ends of the yield curve. Overall, we find that model performance varies along the yield curve. Out-of-sample pricing tests show that most of the term structure models underprice a bond at the short and medium ends of the term structure and generally overprice bonds at the long end. Further, the level of mispricing is related to time-to-maturity, coupon payments and interest rate volatility. The results have implications for bond pricing in relatively illiquid markets like Australias.

Effectiveness of high interest rate policy on exchange rates: A reexamination of the Asian financial crisis

One of the most controversial issues in the aftermath of the Asian financial crisis has been the appropriate response of monetary policy to a sharp decline in the value of some currencies. In this paper, we empirically examine the effects on Asian exchange rates of sharply higher interest rates during the Asian financial crisis. Taking account of the currency contagion effect, our results indicate that sharply higher interest rates helped to support the exchange rates of South Korea, the Philippines, and Thailand. For Malaysia, no significant causal relation is found from the rate of interest to exchange rates, as the authorities in Malaysia did not actively adopt a high interest rate policy to defend the currency.

AN ANALYSIS OF ASIAN MARKET INTEGRATION PRE- AND POST-CRISIS

In this paper cointegrating relations between six East and Southeast Asian markets relative to a base cluster of three global markets are investigated in the framework of zero-non-zero (ZNZ) patterned vector error-correction modelling (VECM). The analysis focuses upon market relations both before and after the Asian currency crisis. The strength of integration between markets is also evaluated by extending Gewekes measurement approach within this framework. The results show that, since the crisis, estimated integration strengths have become more powerful between the Asian and global markets, with the US market leading both the Asian markets and the markets of Japan and the UK.

Practices and Attitudes to Derivatives Use in Australian Commonwealth Organisations

Little is known about risk management in the public sector This study reports on a survey of senior officers in Australian Commonwealth companies and statutory authorities concerning their practice and attitudes towards the use of derivative instruments for risk management. Using a variety of tests, the most important issue identified by respondents concerning the use of derivatives is for budgeting purposes. Of note, respondents rank commonly cited reasons advanced in the private sector such as reduced bankruptcy costs and taxation, as being relatively unimportant, which is consistent with arguments advanced in the paper The results also indicate that there are significant differences in the level of importance in some issues regarding derivatives use across public sector organisations, particularly those differentiated by a documented risk management plan. The study also documents for the first time the extent of derivatives use in the Australian public sector.