Convertible arbitrage: risk, return and performance

This study explores the risk and return characteristics of convertible arbitrage, a dynamic trading strategy employed by hedge funds. To circumvent biases in reported hedge fund data, a simulated convertible bond arbitrage portfolio is constructed. The returns from this portfolio are highly correlated with convertible arbitrage hedge fund indices and the portfolio serves as a benchmark o f fund performance. Default and term structure risk factors are defined and estimated which are highly significant in explaining the returns of the hedge fund indices and the returns of the simulated portfolio, and when specified with a convertible bond arbitrage risk factor in a linear factor model, these factors explain a large proportion of the risk in convertible arbitrage hedge fund indices. The residuals of the hedge fund indices estimated from this model are serially correlated, and a lag of the hedge fund index return is specified correcting fo r the serial correlation and the coefficient o f this term is also interpretable as a measure o f illiq u id ity risk. A linear multi-factor model, incorporating several lags o f the risk factors is specified to estimate individual fund performance. Estimates o f abnormal performance from this model provide evidence that convertible arbitrageurs generate abnormal returns between 2.4% and 4.2% per annum. The convertible arbitrage hedge fund indices and individual hedge fund returns used to evaluate performance generally exhibit negative skewness and excess kurtosis. Residual Augmented Least Squares (RALS), an estimation technique which explicitly incorporates higher moments is used to robustly estimate multi-factor models o f convertible arbitrage hedge fund index returns. Functions o f the hedge fund index residuals are specified as common skewness and kurtosis risk factors in a multifactor analysis of individual fund performance. Results from this analysis provide evidence that failing to specify third and fourth moment risk factors w ill bias upward estimates o f convertible arbitrage individual hedge fund performance by 0.60% per annum. Theoretical non-linearity in the relationship between convertible arbitrage hedge fund index returns and default and term structure risk factor is then modelled using Logistic Smooth Transition Autoregressive (LSTAR) models

Pairs trading in the UK equity market: risk and return

In this paper, we provide the first comprehensive UK evidence on the profitability of the pairs trading strategy. Evidence suggests that the strategy performs well in crisis periods, so we control for both risk and liquidity to assess performance. To evaluate the effect of market frictions on the strategy, we use several estimates of transaction costs. We also present evidence on the performance of the strategy in different economic and market states. Our results show that pairs trading portfolios typically have little exposure to known equity risk factors such as market, size, value, momentum and reversal. However, a model controlling for risk and liquidity explains a far larger proportion of returns. Incorporating different assumptions about bid-ask spreads leads to reductions in performance estimates. When we allow for time-varying risk exposures, conditioned on the contemporaneous equity market return, risk-adjusted returns are generally not significantly different from zero

Liquidity commonality and pricing in UK equities

We investigate the pricing of systematic liquidity risk in UK equities using a large sample of daily data. Employing four alternative measures of liquidity we first find strong evidence of commonality in liquidity across stocks. We apply asymptotic principal component analysis (PCA) on the sample of stocks to extract market or systematic liquidity factors. Previous research on systematic liquidity risk, estimated using PCA, is focused on the US, which has very different market structures to the UK. Our pricing results indicate that systematic liquidity risk is positively priced in the cross-section of stocks, specifically for the quoted spread liquidity measure. These findings around the pricing of systematic liquidity risk are not affected by the level of individual stock liquidity as a risk characteristic. However, counter-intuitively, we find that the latter is negatively priced in the cross-section of stocks, confirming earlier research

The asset pricing effects of UK market liquidity shocks: evidence from tick data

Using tick data covering a 12 year period including much of the recent financial crisis we provide an unprecedented examination of the relationship between liquidity and stock returns in the UK market. Previous research on liquidity using high frequency data omits the recent financial crisis and is focused on the US, which has a different market structure to the UK. We first construct several microstructure liquidity measures for FTSE All Share stocks, demonstrating that tick data reveal patterns in intra-day liquidity not observable with lower frequency daily data. Our asymptotic principal component analysis captures commonality in liquidity across stocks to construct systematic market liquidity factors. We find that cross-sectional differences in returns exist across portfolios sorted by liquidity risk. These are strongly robust to market, size and value risk. The inclusion of a momentum factor partially explains some of the liquidity premia but they remain statistically significant. However, during the crisis period a long liquidity risk strategy experiences significantly negative alphas

Predictability revisited: UK equity returns, 1965-2007

This study tests a large sample of UK equity returns from 1965 to 2007 for predictability. Returns are tested using the Lo and MacKinlay (1988) variance ratio test and the Chow and Denning (1993) multiple variance ratio tests. Overall, the results show strong signs of predictability. There is a size effect, in which small equities appear more predictable in the first half of the sample (1965–1985), and mid- to large-size equities appear more predictable in the second half of the sample (1986–2007)

What is the cost of faith? An empirical investigation of Islamic purification

Based on the Qur'anic prohibition against interest (riba), this paper quantifies the true cost of purification for the first time. The extant literature focuses on the performance of various Islamic portfolios but the returns of these funds are pre-purification. This is a significant oversight given that, for some scholars, the entire permissibility of the industry rests on purification. By comparing the impact on returns of three purification methodologies we show that purification adversely and statistically significantly impacts portfolio returns and that the choice of purification methodology also matters. Our results are robust to alternative portfolio construction methodologies and standardised tax rates. The implications are that purification is not a trivial matter for compliant Muslim investors — comprehensive shari'ah compliance has a significant faith and financial implications for compliant Muslim investors such that it could be argued that, by ignoring the impact of purification on returns, the findings of the extant literature are incomplete

Factors contributing to the temperature beneath plaster or fiberglass cast material

<p>Abstract</p> <p>Background</p> <p>Most cast materials mature and harden via an exothermic reaction. Although rare, thermal injuries secondary to casting can occur. The purpose of this study was to evaluate factors that contribute to the elevated temperature beneath a cast and, more specifically, evaluate the differences of modern casting materials including fiberglass and prefabricated splints.</p> <p>Methods</p> <p>The temperature beneath various types (plaster, fiberglass, and fiberglass splints), brands, and thickness of cast material were measured after they were applied over thermometer which was on the surface of a single diameter and thickness PVC tube. A single layer of cotton stockinette with variable layers and types of cast padding were placed prior to application of the cast. Serial temperature measurements were made as the cast matured and reached peak temperature. Time to peak, duration of peak, and peak temperature were noted. Additional tests included varying the dip water temperature and assessing external insulating factors. Ambient temperature, ambient humidity and dip water freshness were controlled.</p> <p>Results</p> <p>Outcomes revealed that material type, cast thickness, and dip water temperature played key roles regarding the temperature beneath the cast. Faster setting plasters achieved peak temperature quicker and at a higher level than slower setting plasters. Thicker fiberglass and plaster casts led to greater peak temperature levels. Likewise increasing dip-water temperature led to elevated temperatures. The thickness and type of cast padding had less of an effect for all materials. With a definition of thermal injury risk of skin injury being greater than 49 degrees Celsius, we found that thick casts of extra fast setting plaster consistently approached dangerous levels (greater than 49 degrees for an extended period). Indeed a cast of extra-fast setting plaster, 20 layers thick, placed on a pillow during maturation maintained temperatures over 50 degrees of Celsius for over 20 minutes.</p> <p>Conclusion</p> <p>Clinicians should be cautious when applying thick casts with warm dip water. Fast setting plasters have increased risk of thermal injury while brand does not appear to play a significant role. Prefabricated fiberglass splints appear to be safer than circumferential casts. The greatest risk of thermal injury occurs when thick casts are allowed to mature while resting on pillow.</p

Antigenic variation in African trypanosomes: the importance of chromosomal and nuclear context in VSG expression control.

African trypanosomes are lethal human and animal parasites that use antigenic variation for evasion of host adaptive immunity. To facilitate antigenic variation, trypanosomes dedicate approximately one third of their nuclear genome, including many minichromosomes, and possibly all sub-telomeres, to variant surface glycoprotein (VSG) genes and associated sequences. Antigenic variation requires transcription of a single VSG by RNA polymerase I (Pol-I), with silencing of other VSGs, and periodic switching of the expressed gene, typically via DNA recombination with duplicative translocation of a new VSG to the active site. Thus, telomeric location, epigenetic controls and monoallelic transcription by Pol-I at an extranucleolar site are prominent features of VSGs and their expression, with telomeres, chromatin structure and nuclear organization all making vitally important contributions to monoallelic VSG expression control and switching. We discuss VSG transcription, recombination and replication control within this chromosomal and sub-nuclear context

Private hedge fund firms' incentives and performance: Evidence from audited filings

Using an entirely new dataset of audited filings from firms that manage hedge funds, this study examines whether the hedge fund compensation contract aligns managerial incentives and investor interests. Our novel dataset allows us to distinguish between firms focused exclusively on hedge fund management and diversified firms offering products in addition to hedge funds. Our results for compensation data of hedge fund only management firms confirm that compensation increases as assets under management increase, despite increased costs and performance diseconomies of scale. Hedge funds managed by diversified firms have significantly lower performance. A relatively small proportion of the compensation from these firms is generated from hedge funds. The results are consistent with diversified hedge fund firms having weaker alignment between managerial incentives and investment performance