Research Papers - Dept of Business

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Asset pricing and downside risk in the Australian share market
(Routledge, 2017-09-14) Alles, L. A; Murray, L
As downside risk has been identified as a separate risk exposure to investors, we investigate whether downside beta and co-skewness exposure impact on the return to investors in Australian equities. Although considered as a developed market, the Australian Securities Exchange merits separate investigation, as it is small and concentrated on some sectors, when compared with the major developed markets. As realized returns are a proxy for expected returns, we separately examine conditional returns in upturn and downturn periods. We find that both downside risks are separately priced by investors, and that our results are unaffected by the inclusion of a range of company characteristics. We subsequently confirm that returns to each downside risk are not related. In robustness tests, we conclude that the return to downside risk cannot be explained by a size, a value, or a momentum premium. Although it also has explanatory power, the inclusion of a leverage factor also does not reduce the explanatory power of downside risk.
Open Access
Asset Securitization and Structured Financing Future Prospects and Challenges for Countries in Emerging Markets
(International Monetary Fund, 2001-09-01) Alles, L. A
This article examines the issues and challenges involved for institutions, policy makers, and law-makers in less developed countries in their efforts to implement asset securitization techniques in their financial markets. Challenges and issues in the areas of market development, legislation, accounting, regulation and structuring are examined in the light of recent developments in securitization techniques.
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Asset Securitization and Structured Financing Future Prospects and Challenges for Emerging Market Countries
(IMF working paper, 2006-01-31) Alles, L. A
This article examines the issues and challenges involved for institutions, policy makers, and law-makers in less developed countries in their efforts to implement asset securitization techniques in their financial markets. Challenges and issues in the areas of market development, legislation, accounting, regulation and structuring are examined in the light of recent developments in securitization techniques.
Open Access
CAPM and Risk in the Australian Regulatory Context
(SSRN, 2002-09-01) Alles, L. A; Johnson, N. W; Kenyon, P
As one component in the determination of price caps for access to regulated gas pipelines under the National Access Code for Natural Gas Pipeline Systems (which is given legal effect through relevant State legislation), regulators utilise the CAPM to determine a 'reasonable' rate of return on the capital employed by the pipeline owner in the provision of gas transport services. A key issue in the use of CAPM in this manner is the determination of beta, the coefficient measuring systematic risk in the CAPM. Pipelines are not commonly traded in Australia, and hence market betas cannot be readily calculated from market data. This necessitates estimation of beta by other means. The methods used in practice is essentially a combination of comparisons with like pipelines which are traded (usually in the US or UK) combined with what can best be described as guesswork to incorporate differences between these pipelines and the pipelines being regulated. This process is less than rigorous and subject to rent-seeking behaviour by pipeline owners. This paper considers risk from the perspective of first principles, and derives a methodology for determining beta in the Australian regulatory context based upon a theoretical consideration of diversification choices of individuals.
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The cost of downside protection and the time diversification issue in South Asian stock markets
(Routledge, 2008-06-01) Alles, L. A
The objectives of this article are to carry out a comparative study of the costs of downside protection for investors in the stock markets of Bangladesh, India, Pakistan and Sri Lanka, and to investigate the time diversification issue in these markets by examining the variation of this cost as the investment horizon is extended. The cost of downside protection and time diversification effects are investigated by examining the properties of a protective put strategy and a capital protected equity participation strategy in each country’s stock market over investment horizons ranging from 1 to20 years. Long-horizon investment outcomes are generated using a bootstrapping technique. Results indicate that the cost of downside protection differs from one country to another, but there is a common pattern of the cost decreasing as the investment horizon lengthens. In overall terms, the pattern of decreasing protection costs at longer investment horizons is consistent with the notion of the time diversification benefits of investment risk.
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Design considerations for retirement savings and retirement income products
(Palgrave Macmillan UK, 2011-02) Alles, L. A
In the backdrop of a world with an ageing population and increasing life expectancy, the impact of the global financial crisis on the values of pension and superannuation funds has underscored the vulnerability of the wealth pool of retirees and their well-being during retirement. In light of this, it is important to examine how the design and delivery of retirement savings and income products can address these vulnerabilities. The purpose of this article is to review and evaluate the factors that need to be considered and the features that need to be incorporated in designing and developing retirement savings and retirement income products to address the concerns of investors, both in the accumulation and draw down phases of retirement investment management.
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The Effect of Investment Horizons on Risk, Return and End‐of‐Period Wealth for Major Asset Classes in Canada
(Blackwell Publishing Ltd, 2006-06) Alles, L. A; Athanassakos, G
The objective of this paper is to investigate whether the current pructice among financiul planners of recom- mending stocks at an eurly age and progressively mov- ing into cash or bonds as retirement upproaches would be uppropriate. We computed returns, risks and end-of- period wealth distributions of vurious Canadian asset classes at increasing horizons between I957 and 2003, bused on the bootstrapping technique. Results show that investment outcomes at short horizons can be quite d$- ferent from outcomes at longer horizons. Evidence is provided in jiavour of time diversificution, while the cur- renl market practice oj' life cycle investing is not fully supported as stocks continue to exhibit more favourable risk-return payoffs than other asset classes, even at shorter time intervuls
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An examination of causality and predictability between Australian domestic and offshore interest rates
(North-Holland, 2000-01-01) Alles, L. A; Ann, A.T. H
This paper studies the causality and predictability between Australian domestic and offshore short term interest rates in both the first and second moments during the period 1987 to 1996. Causality flow is observed to be stronger from the domestic to the offshore market in the earlier sub periods but characterised by significant two-way causality flow in the latter sub-periods. Volatility tests show that the volatility in one market spills over to the other market simultaneously, which is consistent with Australian markets being well integrated with global markets. The predictability across the two markets in the first moments is examined through an error correction model, whose forecasting performance is assessed relative to a benchmark random walk model. To test the predictability of volatility, four different models are compared: A GARCH model, A GARCH model incorporating contemporaneous spillover effects, a GARCH model with lagged spillover effects, and a benchmark random walk model. Results indicate that the error correction model and the GARCH model with contemporaneous volatility spillover are the superior models for forecasting changes in interest rates and for forecasting volatility, respectively.
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Futures and forward price differential and the effect of marking-to-market: Australian evidence
(Blackwell Publishers Ltd, 2001-07) Alles, L. A; Peace, P. P. K
The objective of this paper is to examine the effects of marking-to-market of futures contracts on the price differential between futures and forward contracts based on the predictions ofthe Cox, Ingersoll and Ross (1981) (CIR) model. Cox et al., (1981) derive a series of propositions with respect to the relationship between futures and forward prices and a set of testable implications. These are tested empirically in this paper using Australian data from November 1991 to June 1997. The results provide evidence of the presence of significant futures and forward price differences, where the futures price is consistently below the forward price. Only partial support is found for the Cox et al., (1981) propositions, implying that the effect of marking-tomarket is not able to fully account for the price differential. Therefore, it is not possible to rule out the influence of other institutional factors on the futuresforward price difference.
Open Access
The Global Financial Crisis and Pro-Cyclical Instability Issues of Financial Institutions: The Post-Crisis Responses
(SSRN, 2010-01-15) Alles, L. A
Key factors identified as contributing to the global financial crisis included the roles of financial accounting policies and credit rating agencies, and the combination of these factors in producing a continuing pro-cyclical destabilising effect on financial institutions. This article examines the progress made so far or the lack of it, in addressing these issues in the post-crisis period.
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Identification of stock market maniplulation: a case study
(Business Perspectives, Publishing Company, 2008-05-05) Alles, L. A; Simpson, J; Evans, J; Westaway, J
This paper is based on an actual expert witness report undertaken by university business academics for a corporate regulatory authority in a developed country. The paper describes the methodology used to identify cases of stock market manipulation by insiders of a no liability mining company. An actual data set has been analyzed but the company and the country remain anonymous. It should be added that the real parties originally under suspicion were in fact charged with stock market manipulation based on the actual expert witness report outlined in this paper.
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Industry return predictability, timing and profitability
(North-Holland, 2006-04-01) Yao, J; Alles, L. A
This paper aims to investigate the predictability of Australian industrial stock returns. Several identified economic variables are found to contain significant predictive power over industry portfolio returns in a Bayesian dynamic forecasting model. The Bayesian updating process was also applied in an investigation of out-of-sample prediction, timing ability and the profitability of an investment strategy of industry-rotation. When the predictor variables are employed in out-of-sample analysis, the predictive power is superior to the naïve prediction. The timing ability and profitability associated with predictability are also economically significant. When the industry momentum is examined, the results show that a group-rotation strategy can enhance the portfolio performance.
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The information on inflation in the Australian term structure
(Routledge, 1997-12-01) Alles, L. A; Bhar, R
In this paper we examine the information on inflation contained in the term spread of the Australian term structure in a model in which we allow the expected real term spread to vary with time. Previously, Mishkin (1990) assumed a constant expected real term spread in a similar inflation forecasting model. We further extend the model by allowing the coefficient of the nominal yield spread also to vary with time. Results show that the model based on the time-varying expected real rate, estimated with the Kalman filter, is more suitable than the model based on the constant real rate. Also, the term spread lagged one period has more information on future inflation than the contemporaneous term. Finally, the forecasting power of a model with a randomly time-varying yield spread is inferior to the other versions examined.
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Investment performance and holding periods: An investigation of the major UK asset classes
(Palgrave Macmillan UK, 2009-12) Alles, L. A; Murray, L
The objective of this article is to offer further investigation of the practice of investors to concentrate their investments in cash or bonds as they grow older, and their investment horizons decrease. To provide evidence in this regard, we assess the impact of investment horizon by computing returns, risks and end-of-period wealth distributions of the major UK asset classes, over increasing time horizons. We use monthly observations between 1963 and 2005, and our assessment is based on a block bootstrapping technique. This methodology offers an improvement on previous studies, as it facilitates the retention of past time series patterns of returns. It is likely that these patterns will continue into the future. Results show that investment outcomes at short horizons are different to outcomes at longer horizons. Evidence is provided in favour of time diversification, up to a 5-year horizon. Further, we find that the probability of ending with a shortfall in end-of-period wealth decreases as the holding period lengthens. We also find that higher risk asset classes outperform lower risk asset classes and have higher end-of-period wealth for longer holding periods.
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Investment risk concepts and measurement of risk in asset returns
(MCB UP Ltd, 1995-01-01) Alles, L. A
The theory of finance is built around return and risk concepts and a basic tenet of finance is that there is a trade off between the risk and returns of assets. As such the measurement of risk goes to the very core and foundation of the theory of finance. Given that the main theories of finance have been maturing over several decades of discussion and debate, one would imagine that a concept as fundamental as the measurement of risk would be a well settled issue by now. On the contrary, the recent finance literature shows ample evidence that risk measurement and risk concepts are drawing continued scrutiny from academic researchers. This is because there are several alternative, and competing ways in which risk can be conceived of and it is not clear which of the alternative concepts is most appropriate. Each concept of risk can be measured or estimated in several ways as well. Estimation methods can be diverse in their precision. Risk measurement can be further complicated by the fact that risk is not a static feature. Risk changes over time. Whether risk changes can be modelled satisfactorily is a major challenge taken up by researchers.
Open Access
An option pricing approach to the estimation of downside risk: A European cross-country study
(Palgrave Macmillan UK, 2008-05) Alles, L. A
The purpose of this paper is to undertake a comparative study of the costs of downside protection for investors in the four major European stock markets: UK, Germany, France and Italy, and to investigate the time diversification effects in these markets by examining the variation of this cost as the investment horizon is extended. The cost of downside protection and time diversification effects are investigated by examining the properties of a protective put strategy and a capital protected equity participation strategy in each country's stock market over investment horizons ranging from 1 to 20 years. Long-horizon investment outcomes are generated using a bootstrapping technique. Results indicate that the cost of downside protection differs from one country to another, but there is a common pattern of the cost decreasing as the investment horizon lengthens. In overall terms, the pattern of decreasing protection costs at longer investment horizons is consistent with the notion of the time diversification benefits of investment risk.
Open Access
Risk factors in the Sri Lankan capital market
(2008) Alles, L. A; Murray, L
This paper examines whether additional risk factors such as the variance, skewness and coskewness of returns offer an appropriate explanation of company returns in the Sri Lankan Capital Market. Arguments for considering these risk factors in pricing models to better deal with the characteristics of a smaller developing capital market are presented. Using individual company returns, empirical tests examine whether the extra risk factors offer a significant explanation of the cross section of returns. Results indicate that while CAPM betas offer little explanation of company returns, variance and, to a lesser extent, skewness are significantly related to returns in this market. Coskewness has little importance. Robustness tests confirm that these measures are unrelated to company size.