Applied Finance Letters (E-Journal - Auckland Centre for Financial Research)
Not a member yet
149 research outputs found
Sort by
Yesterday’s Tomorrows: Past Visions of Future Financial Markets
Full text linkIt is easy to imagine that the present - yesterday’s tomorrow - was always the future expected in the past. Yet, what we now accept as the normal state of affairs - the present - was not the only possible outcome that could have come to pass nor was it often the most commonly expected one. What is now considered “inevitable” – when viewed from the vantage point of 20/20 hindsight - was often not immediately embraced or accepted. In order to understand where we are going it is important to understand where we have been and how we got there. I want to discuss some past visions of the future of financial markets, in general, and derivative markets, in particular, as seen by academics, practitioners and policymakers at various points in time. There are few advantages of age but one of them is the opportunity to witness changes and remember the contemporary context in which they occurred. I have been fortunate to have had a catbird seat to observe some of the changes in financial markets; first as a student of finance, and later with service: at a regulator; at an exchange; as a trader; in academia. I will draw upon some of my recollections and personal experiences in the discussion that follows. Most readers have always lived in a world where exchange traded derivatives on financial assets existed. Many readers have always lived in a world where interest rate swaps and other over-the-counter (OTC) derivatives were important. Many readers have always lived in a world where exchange traded derivatives on energy, in general, and crude oil, in particular, existed and were important. Some readers have always lived in a world where large Asian financial and commodity futures markets existed and were important in the global price discovery process. Yet, this was not always the cas
Investing In Exchange Traded Funds
Full text linkThis article provides an overview of Exchange Traded Funds (ETFs) and discusses their features including creation, redemption, and trading mechanism. The article further describes the 10 broader categories and 96 sub-categories of ETFs, net assets and annual issuances of ETFs and merits and demerits of investing in ETFs. As a passive but diversified investment strategy, ETFs appear to be better investment vehicles in terms of taxes, lower management fees and expenses, and portfolio risk management. The strategic investment decision in ETFs however depends on investors’ objectives, attitudes towards risks, and time horizon of investment because investing in ETFs could have diverge implications especially during the formation and distribution phases of retirement or pension funds
Australian Stock Indexes and the Four-Factor Model
Full text linkStock indexes are passive ‘value-weighted’ portfolios and should not have alphas which are significantly different from zero. If an index produces an insignificant alpha, then significant alphas for equity funds using this index can be attributed solely to manager performance. However, recent literature suggests that US stock indexes can demonstrate significant alphas, which ultimately raise questions regarding equity fund manager performance in both the US and abroad. In this paper, we employ the Carhart four-factor model and newly available Asian-Pacific risk factors to generate alphas and risk factor loadings for eight Australian stock indexes from January 2004 to December 2012. We find that the initial full sample period analysis does not provide indication of significant alphas in the indexes examined. However, by carrying out 36-month rolling regressions, we discover at least four significant alphas in seven of the eight indexes and factor loading variability. As previously reported in the US, this paper confirms similar issues with the four-factor model using Australian stock indexes and performance benchmarking. In effectively measuring Australian equity fund manager performance, it is therefore essential to evaluate a fund’s alpha and risk factors relative to the alpha and risk factors of the appropriate benchmark index
Credit Spreads and Equity Volatility during Periods of Financial Turmoil
Full text linkWe present a joint analysis of the term structure of credit default swap (CDS) spreads and the implied volatility surface for the United States and five European countries from 2007– 2012, a sample period covering both the Global Financial Crisis (GFC) and the European debt crisis. We analyze to which extent effective cross-hedges can be performed between the CDS and equity derivatives markets during these two crises. We find that during a global crisis a breakdown of the relationship between credit risk and equity volatility may occur, jeopardizing any cross-hedging strategy, which happened during the GFC. This stands in sharp contrast to the more localized European debt crisis, during which this fundamental relationship was preserved despite turbulent market conditions for both the CDS and volatility markets
The implied cost of capital of government’s claim and the present value of tax shields: A numerical example
Full text linkThis paper provides a numerical example of how to calculate the cost of capital of government’s claim (rg) and the present value of tax shields. Schauten and Tans (2006) show for the models used in Myers (1974), Miles and Ezzell (1980) and Harris and Pringle (1985), that the present value of tax shields is equal to the difference between the present value of the expected taxes paid by the unlevered firm and the levered firm, with each of the models’ implied rg as discount rate. We discuss a numerical example using the valuation framework by Schauten and Tans (2006) and give a logic explanation for the low implied rgs of Miles and Ezzell’s and Harris and Pringle’s model
MySuper Vs. KiwiSaver: Retirement Saving For The Less Engaged
Full text linkAustralia’s MySuper default superannuation funds are compared against New Zealand’s range of KiwiSaver funds. Some key points of contrast include: the relative maturity and larger balances of the Australian system; the majority of MySuper providers are not-for-profit, whereas KiwiSaver is dominated by for-profit providers; MySuper funds use a much broader range of assets, while KiwiSaver funds invest largely in listed assets; greater use of lifecycle strategies in Australia; the skew to conservative funds under KiwiSaver; and differing fee structures, the impact of which depends on account balance. It is argued that New Zealand could do more to enhance the probability of achieving adequate incomes in retirement
Latin American iShares: Prices And Premiums
Full text linkETFs have fast become one of the most popular investment instruments not only in developed markets but also in emerging markets. This study examines the prices and premiums of a sample of country-specific Latin American ETFs, a highly popular group of ETFs with investors, but relatively unexplored in academic literature. Regression analysis is used to measure price efficiency and the persistence of deviations from net asset value. I find that although price efficiency is high, other factors, beside fundamental value explain the variation in prices. Most of the ETFs in the sample are more likely to trade at a premium and deviations from net asset value persist at least for a day
If I pick A Winning Manager, Aren’t I Likely To Beat The Market?
Full text linkRecently in New Zealand a few star managers have had brilliant runs easily outperforming markets since inception. Why on earth would an investor not want to use these funds for their New Zealand share allocation? We have a lot of respect for what star performers have done. It’s not easy to produce exceptional performance. But for all their glory, the websites of the star performers provide us with the answer to the question… “Past performance is no guarantee of future returns.” When asked a question about a star investment manager we typically respond with a question of our own that goes something like this, “Would you believe that this is a very well-studied issue?
Kiwisaver, who is really reaping the benefits?
Full text linkNew Zealand KiwiSaver fund industry enjoys a near monopoly situation, with no exposureto international competition. Annual fees that KiwiSaver funds charge New Zealanders(which are now close to $350 million p.a.) are far above international standards and notjustifiable given their relatively poor performance since inception. We believe that allowingself-managed retirement portfolio investments by employees, expanding the menu ofinvestment choices including low cost international ETFs, and opening the industry tointernational competition will be beneficial for individual investors and the country as whole
Market conditions and time varying conditional correlations
Full text linkThis paper shows how the dependency of time-varying conditional crosscorrelation on prevailing market conditions can be modeled. With this modelling approach it is possible to empirically investigate how correlations between different markets are dependent on market volatilities and other external factors. The paper shows that the modeling of conditional correlations can be simplified to modeling a univariate GARCH-process. The advantage of this approach is that it allows for utilization of existing GARCH methodology and software to estimate the dynamics of correlation. Our empirical results reveal that time-varying correlations between stock markets are largely unpredictable and are at best dependent on world market volatilities. Weaker evidence is found that correlations are driven by market downturns.