Index tracking in Australian equities

The growth in passive investment management has been significant over the last decade. Total assets benchmarked to the S&P SOO index exceed US$I trillion, and a similar experience of investors embracing indexing have been recorded across other Western countries, including the UK, Canada and Australia

Closing a mental account: the realization effect for gains and losses

How do risk attitudes change after experiencing gains or losses? For the case of losses, Imas (Am Econ Rev 106:2086–2109, 2016) shows that subsequent risk-taking behavior depends on whether these losses have been realized or not. After a realized loss, individuals’ risk-taking decreases, whereas it increases after an unrealized (paper) loss. He refers to this asymmetry as the realization effect. In this study, we derive theoretical predictions for risk-taking after paper and realized gains, and for investment opportunities with different skewness. We experimentally test these predictions and, at the same time, replicate Imas’ original study. Independent of a prior gain or loss, we show that subsequent risk-taking is higher when outcomes remain unrealized. However, we find no evidence of a realization effect for non-positively skewed lotteries. While the first result suggests that the effect is more general, the second result reveals its boundary conditions

The European Union Emissions Trading System and the Market Stability Reserve: Optimal Dynamic Supply Adjustment

The supply of allowances in the European Union Emissions Trading System is determined within a rigid allocation programme. A reform of the EU ETS intends to make allowances allocation exible and contingent on the state of the system. We model the emissions market under adjustable allowance supply in a stochastic partial equilibrium framework and obtain closed form solutions for its dynamics. The model considers a supply control mechanism contingent on the number of allocated and unused allowances, as suggested by the European Commission. We derive analytical dependencies between the allowance allocation adjustment rate and the market equilibrium dynamics, which allows us to represent the quantity thresholds as quantiles for the number of allocated and unused allowances. Finally, we present an analytical tool for the selection of an optimal adjustment rate under both risk-neutrality and risk-aversion. We thereby provide an analytical foundation for the regulator's decision-making in the context of the EU ETS reform and give a novel perspective on the mechanism's overall design

Short-selling ban and cross-sectoral contagion: Evidence from the UK

The UK?s Financial Services Authority introduced a ban on the short-selling of specified financial-sector stocks in September 2008. The regulator?s stated objectives were to protect market quality, stabilise the market for financial-sector stocks, and prevent cross-sectoral contagion. We analyse the price, market quality and contagion effects following the imposition of the short-selling ban, and its removal in January 2009. We report evidence consistent with a short-lived overpricing (underpricing) effect immediately after the ban was imposed (lifted). There is evidence of deterioration in market quality while the ban was in force. There is evidence of cross-sectoral contagion from the financial sector to the telecommunication sector immediately before the imposition of the ban, but there is no contagion for seven other non-financial sectors. There is no evidence of contagion while the ban was in force. In terms of preventing cross-sectoral contagion, the ban may be seen as a successful governance mechanism in the regulator?s toolbox.Peer reviewe

A Fundamental Problem with Single Measure Event Studies and the Case of Qualified Audit Reports

This study draws on the case of event studies of qualified audit reports to illustrate that despite numerous improvements in research design, findings do not converge over time. The conflicting evidence is attributed to the nature of the market for a company\u27s shares, and the fact that past studies rely only on one measure of information content, namely, price change or volume change measures. After construction of a simple micromarket structure of a company\u27s shares by drawing on traditional microeconomics, qualitative comparative statics are used to identify the circumstances in which either the volume or the price change caused by a revision of investor expectations, is relatively reduced. Insights are also provided into the question of post-event volume of trading

An Empirical Study of the Effect of Short Selling on the Bid Ask Spread

Soon selling was legally and uniformly reintroduced in Australia in 1986. This presented the opportunity to study the effects of permitting soon selling on stock market trading. The following study aims to determine the impact of short selling on the bid ask spread and thus transaction costs. The evidence presented in this paper supports the notion that soon selling acts to reduce the size of the bid ask spread. The public policy implication is that soon selling is desirable as it acts to reduce the size of transactions costs on the stock exchange

Earnings as an Explanatory Variable for Returns: A Note

Easton and Harris (1991) [herein EH], in a recent article, investigate whether the level of earnings divided by price at the beginning of the stock return period is relevant for evaluating earnings/returns associations [p 19]. As stated by EH, the contribution of their study stems from their variable of interest, which is not the earnings-to-price ratio based on contemporaneous (past) earnings and contemporaneous (past) price which has dominated earlier studies. Despite their excellent empirical work, unfortunately, their theorising is somewhat ad hoc and they admit that for certain aspects of their theorising we provide a more heuristic analysis [footnote, p. 8]. It is the purpose of this paper to provide a derivation of the relationship between the level of earnings divided by the beginning of period stock price and stock returns, using the well known and widely accepted Gordon growth model of stock valuation originally attributed to Gordon and Shapiro (1956), and the behavioural dividend model originally developed and tested by Lintner (1959). The model derived provides alternative interpretations of the parameters of the empirical model estimated by EH, and suggests that one of the variables and the fundamental model estimated by EH is mis-specified