Viet Minh Do

Do Australian hedge fund managers possess timing abilities

This article focuses on the performance of Australian hedge funds. Using a survivorship bias free sample, we investigate whether Australian hedge fund managers have the ability to outguess the market. Specifically, we test the market timing and volatility timing skills of fund managers. Our findings show that Australian hedge fund managers do not possess market timing skills, but they do exhibit superior stock selection ability. Our findings also show that while Australian managers do not have market volatility timing skills, their US counterparts do exhibit such skills.

Does the 2008 short sale ban affect the enforcement of the Law of One Price? Evidence from Australia

Using evidence from pairs trading in Australia’s equity market, we study the effect of the 2008 worldwide ban on short selling on the Law of One Price (LOP). We find that the ban surprisingly does not hinder the enforcement of the LOP. Violations did arise rather frequently in the turbulent market during the ban period; however, they were subsequently corrected, with prices of close economic substitutes promptly converging to parity. We show that the working of the LOP is not driven by professional arbitrageurs. We suggest that rational, long‐only investors are likely to be the enforcer of the LOP, as these investors who are unbound by the ban, simply sell their holdings of stocks that are overpriced relative to their close economic substitutes.

Factors Affecting the Birth and Fund Flows of Commodity Trading Advisors

This paper investigates the birth of commodity trading advisers (CTAs) and their flow–performance relation. Specifically, we address three questions. First, we investigate the impact of existing CTAs’ performance on the number of new CTAs entering the market. Second, we investigate the importance of performance and other fund-specific factors to fund flows throughout the entire lives of CTAs. Third, we examine the smart money effect on CTAs. That is, we ask whether investors are successful in selecting subsequent well performing CTAs. Our results show that CTA managers tend to start up funds after a period of poor performance across the CTA industry. The flow-performance relation is strongly supported, with top-performing CTAs rewarded with high inflows. However, we find no evidence of ‘smart money’ effect, indicating that investors are generally unsuccessful in choosing subsequent well performing CTAs.

Liquidity shock management: Lessons from Australian banks

Prior to the 2007–2009 financial crisis, international banks had an average share of around 65% of the syndicated loan market in Australia. When the crisis hit, the resulting liquidity shock resulted in globally active international banks exiting the Australian market. With limited global operations, the major Australian banks were able to absorb and manage the liquidity shock. This resulted in domestic banks carrying a significantly greater proportion of revolving credit facilities in their syndicated loan portfolios after 2008. Domestic bank willingness and ability to deal with the market disruption and to hold a greater proportion of high liquidity risk revolvers are directly linked to the level of their transaction deposits. Their increased involvement in revolving facilities cannot be fully explained by the certification effect or flight-to-home effect. It is not demand driven and is robust to endogeneity tests.

Factors affecting the birth and fund flows of CTAs

Our paper investigates the timing of the inception of commodity trading advisors and the relationship between their fund flows and performance. Our results show that commodity trading advisor industry performance has, over the long-run (short-run), a positive (negative) effect on new commodity trading advisors. The functional form of the flow-performance relation varies across commodity trading advisor subcategories. Also, we do not observe a ‘smart money’ effect, indicating that investors are generally unsuccessful in choosing subsequent high-performing commodity trading advisors.

The additional cost of hedging in foreign currency loans

Foreign currency denominated loans (FCDLs) are an important part of corporate funding as well as an operational risk management tool. We show that domestic borrowers use FCDLs to hedge their foreign exchange risk exposure. FCDLs are found to carry an interest rate premium over domestic currency loans after controlling for borrower characteristics, loan characteristics, and macroeconomic conditions. We argue that borrowers are willing to pay this premium since the marginal benefit of FCDLs as a natural hedge outweighs the marginal cost. From a lender’s perspective, this premium reflects a compensation for additional foreign exchange risk exposure and intensified monitoring efforts. These results are robust to endogeneity-corrected estimations. JEL Classification: G21, G32

Drought Risk in Private Debt Contracts

This study investigates the effect of climate change risk – proxied by Palmer Drought Severity Index (PDSI) – on private debt contracts. We raise a very simple yet important question: Do banks include drought risk in their pricing model of business loan contracts? The result indicates that banks indeed do take into account drought risk in their pricing model. Intuitively, the effect is most pronounced among food industry borrowers where drought has a direct impact. We find that for food industry borrowers, banks increase loan spreads by 6 basis points for every one-step increase of drought level in the 12 months prior to the loan commencement. The magnitude of this effect drops to 2 basis points for non-food borrowers. We also report that covenant intensity increases for borrowers in the food industry when the drought level is higher in the 12 months before loan origination. These results point towards drought risk being viewed as a systematic risk by credit providers. It adds a new dimension to credit risk evaluation and attracts a price premium whose magnitude is stronger for food industry borrowers.

Australian Foreign Currency Loans: Hedging or Arbitrage?

Foreign currency denominated loans (FCDLs) are an important part of corporate funding as well as an operational risk management tool. We show that Australian borrowers use FCDLs to hedge their foreign exchange risk exposure. FCDLs are found to carry an interest rate premium over domestic currency loans after controlling for borrower characteristics, loan characteristics and macroeconomic conditions. We argue that borrowers are willing to pay this premium since the marginal benefit of FCDLs as a natural hedge outweighs the marginal cost. From a lenders perspective, this premium reflects a compensation for additional foreign exchange risk exposure and intensified monitoring efforts. These results are robust to endogeneity-corrected estimations.

Liquidity Advantage of Domestic Banks: Evidence from Australian Syndicated Loans

This paper explore whether there are competitive advantage of Australian domestic banks relative to international banks in absorbing liquidity risk originated from loan contract. We focus on the Australian syndicated loan market and the two types of syndicated loans: term loans and revolving loans. Term loans, entirely funded at origination, are credit risk intensive loans, whilst revolving loans are liquidity intensive as they can be drawn-down at any time by the borrower. We find evidence suggesting that Australian domestic banks are more willing to take liquidity risk. In particular, the proportion of loans held by Australian domestic banks significantly higher for revolving loans. Furthermore, such liquidity advantage amplifies for high risk borrower and when market condition deteriorates. There is also evidence suggesting that the higher level liquidity risk of Australian domestic banks is due to their risk seeking behavior.

The informational content of oil and natural gas prices in energy fund performance

This paper explores whether the informational content of oil and gas prices has an impact on energy mutual fund returns. We first re-visit the relationship between oil and gas prices and energy index returns; our findings confirm that better energy index performance is associated with oil and gas price increases. Using the Fama and MacBeth (1973) two-stage regressions, we find that the information contained in oil and gas prices also plays a significant role in explaining energy mutual fund returns, making these an alternative investment to direct energy stock investments.