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(2008)Journal ArticleFund managers` bias toward geographically proximate securities is a well-researched phenomenon, yet the origins of managers` location choices have received little empirical scrutiny. This paper traces the employment and geographic heritage of 358 entrepreneurial fund managers and analyzes the determinants of where they locate their firms and stock selections. The evidence suggests that start-ups tend to be based close to the origins of their founders and in regions with more investment management firms, banking establishments, and large institutional money managers. New money managers show a strong local bias in their equity holdings, three times the levels previously documented for mutual funds. The propensity to invest closer to home correlates strongly with the presence of sub-advisory opportunities from institutional investors in the vicinity. While home bias levels between managers who relocate with their start-ups and the rest of the entrepreneurs are similar, preferences for stocks that were formally local persist.
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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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(2008)ThesisThis research contains three essays that explore the speed of adjustment, volatility and noise in the Indonesia Stock Exchange. The first essay explores the speed of adjustment in the Indonesia Stock Exchange at daily interval from 2000 to 2004. The model employed is the speed of adjustment with noise. Firstly, I work on the estimation of the speed of adjustment. The estimated speed of adjustment coefficient concludes that the large size leads the smaller size group to adjust to new information. Secondly, I analyse the component in the noise that contributes significantly to the speed of adjustment level. It is confirmed that the factor determining the noise is bid-ask fluctuations. Therefore, it is reasonable to infer the component in the noise from bid-ask component. The decomposition of bid-ask spread into transaction cost and asymmetric information reveals that the latter is found to be a significant component determining the speed of adjustment level. The second essay analyses the fine grain dynamics of the speed of price adjustment to new information from 2000 to 2007. The exact time of adjustment is estimated at intraday frequency instead of at daily frequency. In this work, as an alternative of first moment estimation, second moment model-free estimation using volatility signature plot to estimate of the speed of adjustment is proposed. Both first and second moment estimation of the speed of adjustment provide consistent result of 30 minute adjustment period. Negative relation after 5-minute return interval between speed of adjustment estimate and realized variance is found implying lower noise leads to smaller deviation between observed and equilibrium price. In the third essay, I concentrate the work on the second moment of continuously compounded returns from 2000 to 2007 in the Indonesia Stock Exchange. The main purpose of the last essay is to estimate the noise and efficient variance in the Indonesia Stock Exchange. The realized variance based estimator is employed in the third essay. During the period of the study, noise variance decreases indicating smaller deviation between the observed and equilibrium price, hence improving market quality in the Indonesia Stock Exchange. The optimal frequency to estimate the efficient variance, on average, is nine minutes. The variance ratio of daily efficient variance to daily open-to-close reveals significant private information underlying price process in the Indonesia Stock Exchange.
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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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(2008)ThesisThe Basel Committee has released a consultative document (Basel (2003)) on the management and supervision of interest rate risk (IRR). This document outlines a standardised model to calculate a duration-based proxy for IRR in depository institution balance sheets. We utilise this methodology to define an IRR measure which we denote BIRRM (Basel Interest Rate Risk Measure). It is the change in the value of a financial institution produced by a 200 basis-point increase in interest rates at all maturities, relative to Tier I and Tier II capital. This study has three primary objectives. Firstly, we utilise BIRRM to provide an overview of IRR exposure of Australian Credit Unions and Building Societies (CUBS) over the period September 1997 to September 2007. Secondly, we seek an understanding of the relationship between BIRRM and measures of CUBS' interest rate sensitivity over a period of rising interest rates (December 1998 to September 2000) and another period of falling rates (September 2000 to December 2001). Finally, we seek an understanding of the economic factors that influence IRR exposure decisions of CUBS by modelling the determinants of CUBS' IRR exposure. We find that IRR exposure of CUBS is relatively low and, on average, CUBS are exposed to falling interest rates. We also find significant relationships between BIRRM and measures of CUBS' interest rates sensitivity consistent with a priori expectations, supporting the use of the Basel Committee's measure of IRR in identifying CUBS with large IRR exposures. The models examining the determinants of CUBS' IRR have relatively low explanatory power. There are however significant relationships between a number of factors and CUBS' exposure to changing rates.
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(2008)Journal ArticleThis paper examines the spillover impacts of the U.S. Fed’s and the European Central Bank (ECB)’s target interest rate news on the first two moments of the Asia-Pacific exchange rates against the US dollar and the euro over the period 1999-2006. The spillover effects on the mean are generally consistent with the literature where a majority of currencies depreciates against the USD and the EUR in response to unexpected rate rises. Both the Fed and the ECB news elicited tardy or persisting volatility responses. The Fed’s news tends to send a leading signal upon the upcoming decision of the ECB, while the ECB’s news tends to confirm the Fed’s decision. This relationship between the news tends to help reduce volatility in the Asia-Pacific currency markets.
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