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(2007)Journal ArticleThis study examines how the termination of superannuation investment mandates contributes to the departure of top fund managers in companies delegated the portfolio management role. Terminations of superannuation plan mandates increase the probability of a fund company changing the responsible fund manager. Objective-adjusted returns are also significant managerial turnover considerations. These results illustrate that significant losses of superannuation fund clients act as an external control mechanism in the investment management industry that complements internal managerial performance measures.
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(2007)Journal ArticleThis paper analyses relations between stock market returns and mutual fund flows in Korea. A positive relationship exists between stock market returns and mutual fund flows, measured as stock purchases and sales and net trading volumes. In aggregate, mutual funds are negative feedback traders. Standard causality tests suggest that it is predominantly returns that drive flows, while stock sales may contain information about returns. After controlling for declining markets, the results suggest Korean equity fund managers tend to increase stock purchases in times of rising market volatility, possibly disregarding fundamental information, and to sell in times of wide dispersion in investor beliefs.
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(2007)Journal ArticleWe examine the information content of managed fund ratings for Australian retail investors. Because fund ratings, premised on a quantitative-qualitative model, are highly transitory, we question whether investors formulate their investment decisions with respect to changes in ratings and whether ratings, in turn, react to fund flows. We find that information regarding fund flows can be obtained from ratings, and that rating changes can have farreaching effects. Investors flock to newly upgraded funds while they penalize those that have been downgraded by withdrawing funds. Investors are constantly anticipating ratings revisions, particularly downgrades, and we attribute this phenomenon to the role of qualitative factors in the ratings.
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(2007)ThesisThis dissertation presents an examination of the trading behaviour of active Australian fund managers. The thesis begins with an analysis of how fund manager trades relate to stock returns in the past, the present, and the future. The dissertation next proceeds to investigating how fund size affects fund performance, trading and portfolio construction. Finally, using earnings announcements as the locus for trading sequences, we analyse the nature of the information used by fund managers to predict stock returns. This research is presented in the form of three essays. The first essay investigates how active fund manager trades relate to stock returns. Using a unique database of daily transactions from Australian equity managers, we document that our sample of institutional investors exhibit statistically and economically significant predictive power in forecasting future stock returns over the ten days following their trades. Furthermore, detailed analysis indicates that manager style is important in understanding the link between institutional trading and stock returns. The essay finds growth-oriented managers are momentum traders, while style-neutral and value managers are contrarian. Further, the contemporaneous relation between institutional trading and returns depends on trade size, broker use, and investment style. Finally, the study documents that trades and returns are inversely related for value/contrarian managers and directly related for style-neutral and growth managers. The second essay presents an analysis of how fund size affects investment performance. Recent studies find evidence that small funds outperform large funds. This fund size effect is commonly hypothesized to be caused by transaction costs. Due to the lack of transactions data, prior studies have investigated the transaction costs theory only indirectly. This study however, analyses the daily transactions of active Australian equity managers and finds aggregate market impact costs incurred by large managers are significantly greater than that Finally, the third essay examines the nature of price-sensitive earnings information used by package formation and portfolio characteristics consistent with transaction cost intimidation. An analysis of the interaction between transaction cost intimidation and the fund size effect documents that large managers pursue a highly active trading strategy, and accordingly suffer more from the fund size effect than is the case for large funds following a less active trading strategy. This suggests the fund size effect is related to transaction costs as trading activity is a good proxy for expected market impact. Finally, the third essay examines the nature of price-sensitive earnings information used by fund managers to trade. While a number of recent mutual fund performance studies find data, prior studies have investigated the transaction costs theory only indirectly. This study however, analyses the daily transactions of active Australian equity managers and finds aggregate market impact costs incurred by large managers are significantly greater than that Finally, the third essay examines the nature of price-sensitive earnings information used by package formation and portfolio characteristics consistent with transaction cost intimidation. An analysis of the interaction between transaction cost intimidation and the fund size effect documents that large managers pursue a highly active trading strategy, and accordingly suffer more from the fund size effect than is the case for large funds following a less active trading strategy. This suggests the fund size effect is related to transaction costs as trading activity is incurred by small managers. Furthermore, large managers exhibit preferences for trade evidence of outperformance relative to suitably constructed benchmarks, limited research exists as to whether such outperformance is due to privately collected information, or merely expedient interpretation of publicly released information. In this essay an examination of the trade sequences of fund managers around earnings announcements is performed, and evidence is presented revealing an increased Occurrence of buy-sell trade sequences around good announcements and vice versa for bad announcements. The results also show an increase in the frequency of fund managers not trading before announcements, only to subsequently purchase during good announcements. Taken together, this evidence suggests managers are reliant on private information before earnings announcements, as well as them engaging in 'interpretation' of earnings announcements when they do not receive a private signal.
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(2007)ThesisThe Efficient Market Hypothesis (EMH) has had significant impact on the theory and practice of investments. However technical trading rules have continued to be used by practioners and have been the focus of many academic studies which have focused on equity, foreign exchange and futures markets. The scarcity of research into technical trading models for fixed income markets is astonishing considering the significant size and consequent investor importance of fixed income markets relative to other financial markets and the extensive application of technical trading models by market participants. This is one of the few studies that develops a technical trading model applicable to fixed income markets. Black (1986) defined Efficient Markets as a market where deviations from fundamental values were short lived and small in magnitude. Fundamental asset values are hard to calculate, but we are able to identify fundamental values for a set of Government Bonds on the principle that yield relativities between such bonds are quite stable except for 'deliberate' changes in trading behaviour. We find that the deviations from fundamental value are short lived and small in magnitude. We exploit deviations from fundamental value by Butterfly Trading strategies; Normal Butterfly trades earning returns from movements in yield curve slope and curvature and Arbitrage Butterfly trades earning returns from yield curve curvature only. After considering transaction costs, we achieve annualised returns of 120bps from our Normal Butterfly trades and 72 bps from our Arbitrage Butterfly trades. Consistent with the risk-return relationship for financial instruments, we find that the returns and the volatility of returns for Normal Butterfly trades are higher than the returns and volatility of returns for Arbitrage Butterfly trades. Normal Butterfly trades are exposed to yield curve slope changes whereas Arbitrage Butterfly trades are not, resulting in higher risk and higher returns for Normal Butterfly trades. This finding is consistent with the results obtained by Fabozzi, Martellini and Priaulet (2005).
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(2007)ThesisThis thesis introduces the application of discrete Principal Component Analysis (PCA) to corporate governance research. Given the presence of many discrete variables in typical governance studies, I argue that this method is superior to standard PCA that has been employed by others working in the area. Using a dataset of 244 companies listed on the London Stock Exchange in the year 2002-2003, I find that Pearson's correlations underestimate the strength of association between two variables, when at least one of them is discrete. Accordingly, standard PCA performed on the Pearson correlation matrix results in biased estimates. Applying discrete PCA on the polychoric correlation matrix, I extract from 28 corporate governance variables 10 significant factors. These factors represent 8 main aspects of the governance system, namely auditor reputation, large shareholder influence, size of board committees, social responsibility, risk optimisation, director independence level, female representation and institutional ownership. Finally, I investigate the relationship between corporate governance and a firm's long-run share market performance, with the former being the factors extracted. Consistent with Demsetz' (1983) argument, I document limited explanatory power for these governance factors.
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(2007)Book ChapterThis paper considers the relationship between stock market autocorrelation and i) the presence of international investors which is proxied by the level of capital market integration, and ii) stock market volatility. Drawing from a sample of stock indices for a range of emerging or newly emerged markets, significant evidence of a relationship between the presence of international investors and the level of stock market autocorrelation is found. This evidence is consistent with the view that international investors are positive feedback traders. Robustness testing of this model suggests that the trading strategy of international investors changed as a result of the Asian currency crisis. The evidence for the role of volatility in explaining autocorrelation is, however, is generally weak and varies across the sample countries.
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(2007)Journal ArticleThis paper investigates the intraday efficacy of Yen intervention conducted by the Bank of Japan. Segmenting a 24 h calendar day into three business hours – onshore and two offshore hours – I examine both contemporaneous and ex post intervention effects on the Yen/USD exchange rate. Prior to June 1995, intervention moved the exchange rate in the wrong direction and the level of volatility is significantly raised during Tokyo business hours. This is due to the well-known simultaneity bias. However, during the first overnight hours (London business hours) the simultaneity bias is significantly reduced and by the second overnight hours (New York afternoon hours) intervention successfully reversed the exchange rate trends and reduced the volatility. Post-June 1995, intervention had an immediate effect of reversing the exchange rate trend and it remained effective, although at reduced magnitude, throughout overnight horizons. A volatility reducing effect is significant from the first overnight horizon and its effectiveness rises in the second overnight horizon.
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(2007)Journal ArticleThis paper examines the relationship between international capital flows and the opacity of recipient countries. We use the Price Waterhouse Coopers (PWC) [Price Waterhouse Coopers, 2001. The Opacity Index: A Project of the Price Waterhouse Coopers Endowment for the Study of Transparency and Sustainability] opacity index for the year 2000 and investigate its influence on three types of net international capital flows: foreign direct investment, portfolio capital and international bank lending. We find support for higher opacity leading to a reduction in capital inflows, in general. More interestingly, however, in some cases we find counterintuitive results of more capital flows when opacity relating to specific business climate increases—accounting and regulations for foreign direct investment flows, corruption and regulation for portfolio flows, and corruption and economic opacities for international lending flows. This may be because of potentially higher profit opportunities that may be present due to the greater role unofficial channels of investment practices play as these opacity indices rise. Also, we find international bank lending, in general, responded very differently from foreign direct investment and portfolio flows.
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(2007)Journal ArticleThis paper focuses on the general determinants of autocorrelation and the relationship between autocorrelation and volatility in particular. Using UK stock market index and individual stock price data, a multivariate generalized autoregressive conditional heteroskedasticity (M-GARCH) model is used to generate estimates of conditional autocorrelation. The covariance equation of this model is modified to include the potential determinants of autocorrelation including volatility, which is proxied using the time series of filtered probabilities of a Markov regime switching model. Consistent with the previous literature, this paper documents a negative relationship between volatility and autocorrelation. The results suggest that an asymmetry exists in this relationship which is attributed to the constraints placed on short selling.