Superannuation: Switching and Roulette Wheels

The introduction of choice has resulted in Australia’s superannuation system providing unprecedented flexibility (through increased investment options and the timing choices) for members to optimise their expected benefits. This paper examines the impact of switching between investment options using a normalised ranked return or “roulette wheel” approach developed by Bauer and Dahlquist (2001) for the Australian setting. The paper tests various switching strategies for both single-sector and blended options, for the period 1985–2005, finding that members require forecast accuracy of around 70% to be successful at market timing. Finally, the paper considers the impact of switching strategies on accumulated balances.Superannuation, investment options

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.

On the Value Premium in Malaysia

Davis, Fama and French (2000) report that the value premium in United States’ stocks is robust. Herein, we present out-of-sample evidence for Malaysia, finding that value stocks outperform growth stocks and document an arbitrage opportunity. We observe that the mean monthly returns are substantially higher for the two mimic portfolios (SMB and HML) when compared with the market portfolio. For the period 1991 through 1999, an investor generated 1.92% (annually) holding the market portfolio in Malaysia, compared with the two mimic portfolios, SMB and HML with returns of 17.70% and 17.69% respectively. We also observe that the standard deviations for the two mimic portfolios are significantly lower than the standard deviation of the market portfolio. Moreover, the findings presented in this study reject the notion of survivorship bias advanced by Kothari, Shanken and Sloan (1995) and the data-snooping hypothesis attributed to Black (1993) and Mackinlay (1995) as an explanation for the value premium.Asset pricing, multifactor models, value premium, arbitrage

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

Stock Market Interdependence: Evidence from Australia

This study examines the relationship between Australia’s stock market and the five largest international markets for the period 1991 through 2001. Preliminary findings, using correlation statistics, indicated potential benefits to international diversification for the Australian investor. Further analysis, conducted in the VAR framework using the Johansen co-integration method, found that the Australian market has short and long run linkages with the United States, while tests with other markets found little evidence of interdependence. Moreover, only the US market was found to Grangercause the Australian market.Interdependence, price linkages, internationalisation.

ASSET PRICING IN THE ASIAN REGION

In this asset pricing study, three questions are addressed. First, does the multifactor model of Fama and French (1993) capture returns in Asian stock markets in a meaningful manner? Second, do small firms and high book-to-market equity firms carry a risk premia? Third, can competing hypotheses (such as survivorship bias, data-snooping and irrationality) explain the multifactor model results? The answers from this study are as follows: The multifactor model of Fama and French (1993) provides a parsimonious description of the cross-section of returns, with the relationship between firm size, book-to-market equity and average stock returns being robust for Asian markets over the 1990s. We find that small firms and high book-to-market equity firms carry a risk premia, providing opportunities for mean-variance efficient investors. Finally, our findings reject the claim that the results of multifactor model can be explained by competing hypotheses for the Asian experience.Multifactor asset pricing models, Asian region, size effect, book-to-market equity effect.

Multifactor Models are Alive and Well

A large number of studies have investigated the cross-section of average returns on common stocks in the United States and have found little relationship with the estimated beta of the single-factor model. This paper tests the joint roles of an overall market factor, and factors related to firm size (market equity) and style (book equity to market equity) in the cross-section of average stock returns in Australia, as there is little evidence available on the asset pricing theory in markets outside the United States. This paper also tests the claim that the size and style effect is the result of seasonal phenomena. We report that the three-factor model largely explains the variation in stock returns in a meaningful pattern. We also observe that size and style factors do a good job throughout the sample period and reject the claim that these effects are due to seasonal phenomena. Our results document that the explanatory power of the three-factor model is not restricted to a limited set of portfolios. Moreover, our findings do not support the data-snooping hypothesis.Asset Pricing, Multifactor Models, Seasonality Premium, Size and Book-to-Market