Investor Expectations and Systematic Risk

This study refines the estimation of beta risk within the Capital Asset Pricing Model (CAPM) framework. Evidence is provided that the link between ex-ante risk and ex-post returns is strengthened by more accurately reflecting the formation of investor expectations. An adaptive expectations approach is employed as an estimation technique consistent with the behavioural patterns of investors. Finally, the study compares the capability of risk estimates from both the standard CAPM and adaptive expectation methods to account for future asset returns in Australia.Asset Pricing; Adaptive Expectations; Australia.

Institutional Homogeneity and Choice in Superannuation

In this analysis of institutional investor performance, two questions are addressed. First, what degree of similarity is observed within the market place for retail superannuation funds? Second, what are the implications of homogenous behaviour for member choice policy? The answers from this study are as follows: as an industry, institutional investors destroyed value for superannuation investors for the period 1991 through 2003, under-performing passive portfolio returns by around 60 basis points per annum. Moreover, we find there is a great deal of clustering around this average underperformance. It also appears as though funds have similar risk characteristics which are, on average, defensive. The findings suggest that the products offered by those competing in this market are very similar in nature, hence limiting the potency of choice policy in Australia.Superannuation, underperformance

Australia’s Retail Superannuation Fund Industry: Structure, Conduct and Performance

In this analysis of Australiaâs superannuation arrangements it is our conjecture that the structure and conduct of the retail superannuation industry in Australia directly impacts performance, resulting in the delivery of costly funds management products which add minimal value for investors over the long term. In this study, we take the perspective of an investor faced with selecting a retail superannuation fund, and explore the extent to which various differentiating characteristics (such as style, rating and cost) provide insights into fund quality which uses a variety of asset pricing models for the period 1991 through 2003. The results of this study, suggest that investors cannot garner superior risk-adjusted returns through reliance on such characteristics.Superannuation funds, Australia; Performance evaluation

Forecasting multivariate volatility in larger dimensions: some practical issues

The importance of covariance modelling has long been recognised in the field of portfolio management and large dimensional multivariate problems are increasingly becoming the focus of research. This paper provides a straightforward and commonsense approach toward investigating whether simpler moving average based correlation forecasting methods have equal predictive accuracy as their more complex multivariate GARCH counterparts for large dimensional problems. We find simpler forecasting techniques do provide equal (and often superior) predictive accuracy in a minimum variance sense. A portfolio allocation problem is used to compare forecasting methods. The global minimum variance portfolio and Model Confidence Set (Hansen, Lunde, and Nason (2003)) are used to compare methods, whilst portfolio weight stability and computational time are also considered.Volatility, multivariate GARCH, portfolio allocation

HACking at Non-linearity: Evidence from Stocks and Bonds

The implicit assumption of linearity is an important element in empirical finance. This study presents a hypothesis testing approach which examines the linear behaviour of the conditional mean between stock and bond returns. Conventional tests detect spurious non-linearity in the conditional mean caused by heteroskedasticity and/or autocorrelation. This study re-states these tests in a heteroskedasticity and autocorrelation consistent (HAC) framework and we find that stock and bond returns are indeed linear-in-the-mean in both univariate and bivariate settings. This study contends that previous research may have detected spurious non-linearity due to size distortions caused by heteroskedasticity and autocorrelation, rather than the presence of genuine non-linearity.linearity, nonlinear, heteroskedasticity-robust tests, autocorrelation-robust tests

Discretised Non-Linear Filtering for Dynamic Latent Variable Models: with Application to Stochastic Volatility

Filtering techniques are often applied to the estimation of dynamic latent variable models. However, these techniques are often based on a set assumptions which restrict models to be specified in a linear state-space form. Numerical filtering techniques have been propsed that avoid invoking such restrictive assumptions, thus permitting a wider class of latent variable models to be considered. This paper proposes an accurate yet computationally efficient numerical filtering algorithm (based on a discretisation of the state space) for estimating the general class of dynamic latent variable models. The empirical performance of this algorithm is considered within the context of the stochastic volatility model. It is found that the proposed algorithm outperforms a number of accepted procedures in terms of volatility forecastiNon-linear filtering, latent variable models, stochastic volatility, volatilitry forecasting

Forward looking information in S&P 500 options

Implied volatility generated from observed option prices reflects market expectations of future volatility. This paper determines whether or not, implied volatilities, and hence market expectations, contain any genuinely forward looking information not already captured by historical information. Historical information is represented by current levels of volatility and model based forecasts using a variety of volatility models. The VIX index, constructed from S&P 500 options data is the measure of implied volatility used in this study. Once accounting for historical information, VIX appears to contain no forward looking information regarding future S&P 500 volatilityImplied volatility, information, volatility forecasts, volatility models, realized volatility

The Death of the Overreaction Anomaly? A Multifactor Explanation of Contrarian Returns

Are the returns accruing to De Bondt and Thaler’s (1985) (DT) much celebrated overreaction anomaly pervasive? Using the CRSP data set used by for the period 1926 through 1982, and, for the first time, an additional two decades of data (1983 through 2003), we provide preliminary support for the original work of DT, reporting that the overreaction anomaly has not only persisted over the past twenty years but has increased, on a risk-unadjusted basis. However, using the three factor model of Fama and French (1993) (FF), we find no statistically significant alpha can be garnered via the overreaction anomaly, with contrarian returns driven by the factors of size and value, not the behavioral biases of investors. It is our conjecture that the anomaly is not robust under the FF framework, with ‘contrarian’ investors following such a scheme simply compensated for the inherent portfolio risk held.Overreaction, anomaly, multifactor asset pricing model

Forecasting Equicorrelation

We study the out-of-sample forecasting performance of several time-series models of equicorrelation, which is the average pairwise correlation between a number of assets. Building on the existing Dynamic Conditional Correlation and Linear Dynamic Equicorrelation models, we propose a model that uses proxies for equicorrelation based on high-frequency intraday data, and the level of equicorrelation implied by options prices. Using state-of-the-art statistical evaluation technology, we find that the use of both realized and implied equicorrelations outperform models that use daily data alone. However, the out-of-sample forecasting benefits of implied equicorrelation disappear when used in conjunction with the realized measures.Equicorrelation, Implied Correlation, Multivariate GARCH, DCC

Phenomenology of non-standard Z couplings in exclusive semileptonic b -> s transitions

The rare decays $B\to K^{(*)}\ell^+\ell^-$, $B\to K^{(*)}\nu\bar\nu$ and $B_s\to\mu^+\mu^-$ are analyzed in a generic scenario where New Physics effects enter predominantly via $Z$ penguin contributions. We show that this possibility is well motivated on theoretical grounds, as the $\bar sbZ$ vertex is particularly susceptible to non-standard dynamics. In addition, such a framework is also interesting phenomenologically since the $\bar sbZ$ coupling is rather poorly constrained by present data. The characteristic features of this scenario for the relevant decay rates and distributions are investigated. We emphasize that both sign and magnitude of the forward-backward asymmetry of the decay leptons in $\bar B\to \bar K^*\ell^+\ell^-$, ${\cal A}^{(\bar B)}_{FB}$, carry sensitive information on New Physics. The observable ${\cal A}^{(\bar B)}_{FB}+{\cal A}^{(B)}_{FB}$ is proposed as a useful probe of non-standard CP violation in $\bar sbZ$ couplings.Comment: Minor modifications; version to appear in Phys. Rev.