Applied Finance Letters (E-Journal - Auckland Centre for Financial Research)
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149 research outputs found
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Returns to Low Risk Investment Strategy
Full text linkThe paper studies the low risk anomaly in the Indian market using entire National Stock Exchange (NSE) as sample from January 2001 to June 2016. It provides evidence that low risk portfolio sorted for total risk, systematic risk as well as unsystematic risk individually for the large cap, mid cap, small cap and the entire NSE universe give higher returns to the investor as compared to high risk portfolio. The difference of returns from low risk portfolio versus high risk portfolio is positive as well as economically and statistically significant for all the risk measures. The results also prove that low risk portfolio investing strategy returns outperform the benchmark portfolio. Using either total volatility, idiosyncratic volatility or beta as a risk measure in stocks, the low risk portfolio gives higher returns even after controlling for the well-known size, value and momentum factors. The excess returns are the highest for low risk portfolio sorted for volatility of large cap stocks. Most of the low risk portfolios consists of growth and winner stocks. In conclusion, the low risk portfolio investment strategy is independent of size and gives positive excess returns as compared to high risk portfolio in the Indian stock market
Flight of the Condors: Evidence on the Performance of Condor Option Spreads in Australia
Full text linkThis paper examines whether superior nominal and risk-adjusted returns can be generated using condor option spread strategies on a large capitalized Australian stock. Monthly Commonwealth Bank of Australia Ltd (CBA) condor option spreads are constructed from 2012 to 2015 and their returns established. Standard and alternative measures are used to determine the nominal and risk-adjusted performance of the spreads. The results show that the short put condor spread produces superior nominal and risk-adjusted returns, but seemingly underperformed when the upside potential ratio was taken into consideration. The long iron condor spread also offers reasonable returns across both performance metrics. On the other hand, the short call condor, long call condor, short iron condor and long put condor spreads did not perform as well on a nominal and risk-adjusted return basis. The results suggest that constructing spreads on the foundation of volatility preferences could be a driver of performance for condor option spreads strategies. For instance, short volatility condor spreads with negatively skewed return distribution shapes appear to add value, while long volatility condor spreads with positively skewed return distribution shapes seem to be less attractive over the sample period. Overall, condor option spreads demonstrate high risk-return profiles, offer versatility in their construction and intended pay-off outcomes, create value in some instances and can be executed across varying market conditions. It is suggested that risk averse investors best avoid condor option spreads, while those with above average risk tolerances may be well suited to the strategies, particularly short volatility-driven condor spreads
Short and Sweet or Just Short? The Readability of Product Disclosure Statements
Full text linkGiven the importance of information in making informed financial decisions, it is vital that investors are able to understand the information provided to them. With this in mind, in 2013, New Zealand legislators replaced the existing disclosure documents with the Product Disclosure Statement (“PDS”). The change was in response to large and complex disclosure documents from providers of new or ongoing sales of financial products. PDS documents have a strictly enforced word limit and are meant to be written in plain English to allow “prudent but non-expert” investors access to the information they contain. We compare the readability of the old prospectus and investment statements (the disclosure documents legally required before 2013) with the new PDS for a sample of superannuation mutual funds (referred to in New Zealand as KiwiSaver funds). We find that while the documents are definitely shorter, there have been mixed improvements in the readability of the documents. The main improvements are a reduction in the amount of finance terminology used, while the language in PDSs compared to investment statements is actually more complex, likely driven by the word limit. As a result, while investors require less finance knowledge, they appear to require a higher level of general education to understand the documents, potentially putting the information out of reach of over half the general population
The Measurement of Tracking Errors of Gold ETFS: Evidence from China
Full text linkThis paper presents the first study on the measurement of tracking errorsusing daily figures for gold exchange-traded funds (ETFs) in China. Threemethods are employed to measure tracking errors: 1) calculating theabsolute error measure, 2) calculating the differences between thestandard deviation of the benchmark index and the ETF, and 3) aregression analysis of empirical returns. In general, the results suggest thatthe tracking errors of these ETFs in China are lower than those of equitybasedETFs in Hong Kong, the US, and Australia. This study further appliedtwo optimised replication portfolios (50-10-10-30 and 90-2-3-5) for a totalof three types of simulation portfolio. The overall results suggest that theperformances of the optimised replication portfolios were better than theperformance of the full replication portfolio. Our results provide valuableinsight for both institutional and retail investors and the opportunity forexposure to a wide range of commodity ETFs in China
The Volatility Effect: Evidence from India
Full text linkWe offer empirical evidence that stocks with low volatility earn higher risk-adjusted returns compared to high volatility stocks in the Indian stock market. The annualised excess returns for the low and high volatility decile portfolios amount to 11.40% and 1.30%, respectively, over the period January 2001 to June 2015. The difference of returns is statistically and economically significant for both low and high-risk stocks. Using risk measures of standard deviation and beta, the volatility effect remains after controlling for size, value and momentum. We uncover that the volatility effect is not statistically significant after controlling for beta effect. Our evidence for volatility effect is not dominated by small and illiquid stocks. Our results show that the low volatility portfolio outperforms benchmark portfolio not only in down market but also in up market conditions
The Price of Gold as a Hedge Against the US Dollar
Full text linkWe address the issue of whether the dollar (US dollar) price of gold can be used to hedge the external purchasing power of the dollar. We decompose the dollar price of gold into two parts: a global price of gold and a global price of the dollar. We find that there is no correlation between fluctuations in the global price of gold and fluctuations in the global price of the dollar, or fluctuations in the global price of any individual currency. We show that the observed negative correlation reported in the literature between fluctuations in the dollar price of gold and fluctuations in the dollar is caused by the appearance of the dollar in both variables. The dollar appears in the dollar price of gold with a negative sign that tilts the correlation with fluctuations in the dollar towards negative one
Existence and Exploitability of Financial Analysts' Informational Leadership
Full text linkThis paper bridges two recent studies on the role of analysts to provide new and relevant information to investors. On the one hand, the contribution of analysts to long-term price discovery on the US market is rather low. Considering earnings per share forecasts as the main output of analysts’ reports, their information share amounts to only 4.6% on average. On the other hand, trading strategies set up on these EPS forecasts are quite profitable. Self-financing portfolios yield excess returns of more than 5% over the S&P 100 index for a time period of 36 years, which is persistent after controlling for the well-known risk factors. In this paper, we discuss the link between the low information shares and the high abnormal returns. We argue that information shares of analysts cannot be higher, because otherwise their forecasts would lead to excessively profitable trading strategies which are very unlikely to persist over such a long period of time
Does CEO Emotional Intelligence Affect the Performance of the Company's Research and Development
Full text linkThis paper, using qualitative and quantitative data, investigates how behavioral aspects of managers (measured by emotional intelligence) impact performance of innovative companies (measured by high investment in research and development). The results obtained clearly show, for these companies, there is a significant and positive relationship between CEO emotional intelligent and their financial, social and environmental performance
The Destruction of a Safe Haven Asset?
Full text linkGold has been a store of value for centuries and a safe haven for investors in the pastdecades. However, the increased investment in gold for speculative or hedging purposeshas changed the safe haven property. We demonstrate theoretically and empiricallythat investor behaviour has the potential to destroy the safe haven property of gold. Theresults suggest that an asset cannot be both an investment asset and an effective safehaven asset. This finding has important implications for financial stability since assets aremore likely to exhibit excess comovement and volatility in the absence of a safe haven
Trading and Fat Tails
Full text linkSudden, large price changes periodically occur in speculative markets. Many of these large price moves simply reflect the market’s reaction to new fundamental economic information-- as financial theory would predict. However, some of the most extreme price moves—often characterized (albeit incorrectly) as “Black Swans” in popular parlance--reflect more the predictable behavior of traders in certain situations or poorly designed market microstructures than the arrival of new fundamental information. These trading-induced price moves have important implications for practitioners, policymakers and academics alike