2005 Series

The UK Code of Corporate Governance: Link between Compliance and Firm Performance

Abstract: Listed companies in the UK are required to comply or give reasons for non-compliance with the recommendations of the UK code of corporate governance called ‘The Combined Code’. Prior studies investigating the relationship between compliance and firm performance have found the link to be either non-existent or at best weak. This study, taking a more holistic view of complianceContinue reading

Is Minimum Variance Hedging Necessary For Equity Indices? A Study Of Hedging And Cross-Hedging Exchange Traded Funds

Abstract: This paper investigates the optimal short-term hedging of Exchange Traded Fund (ETF) portfolios with index futures. Using daily data from May 2000 to December 2004 on the four largest passive ETFs (the Spider, the Diamond, the Cubes and the Russell iShare) and their corresponding index futures we examine the performance of minimum variance hedges for efficient variance reduction andContinue reading

Investment Reputation Index: family firms vs. non-family firms in the UK

Abstract: Family firm researchers have found a host of characteristics that are unique to family firms. These familial attributes are often taken as plausible explanations for governance and operational differences between family firms and their non-family competitors. We use these familial characteristics as well as a host of ?non-family? specific provisions to build an Investment Reputation Index that measures theContinue reading

Asymmetries and Volatility Regimes in the European Equity Markets

Abstract: This paper provides and empirical examination of four European equity indices between 1991 and 2005. We investigate the ability of fifteen different GARCH models to capture the characteristics of historical daily returns effectively and generate realistic implied volatility skews. Using many different model selection criteria we conclude that a normal mixture GARCH model with two volatility components, two sourcesContinue reading

On The Continuous Limit of GARCH

Abstract: GARCH processes constitute the major area of time series variance analysis hence the limit of these processes is of considerable interest for continuous time volatility modelling. The limit of the GARCH(1,1) model is fundamental for limits of other GARCH processes yet it has been the subject of much debate. The seminal work of Nelson (1990) derived this limit asContinue reading

The Financial Services Reform Act 2001: Impact on systemic risk in Australia

Abstract: The rise of conglomerate banks and their interrelated balance sheets, pose new challenges to theories of financial regulation. We measure the impact of recent legislative changes in Australia upon systemic risk, for banking and near banking sectors, and demonstrate a significant reduction post the legislation. This is consistent with a major legislative goal, to promote global competitiveness, because itContinue reading

Joined-Up Pensions Policy in the UK: An Asset-Liability Model for Simultaneously Determining the Asset Allocation and Contribution Rate

Abstract: The trustees of funded defined benefit pension schemes must make two vital and inter-related decisions – setting the asset allocation and the contribution rate. While these decisions are usually taken separately, it is argued that they are intimately related and should be taken jointly. The objective of funded pension schemes is taken to be the minimization of both theContinue reading

Optimal Hedging and Scale Invariance: A Taxonomy of Option Pricing Models

Abstract: The assumption that the probability distribution of returns is independent of the current level of the asset price is an intuitive property for option pricing models on financial assets. This ‘scale invariance’ feature is common to the Black-Scholes (1973) model, most stochastic volatility models and most jump-diffusion models. In this paper we extend the scale-invariant property to other models,Continue reading

Merging Schemes: An Economic Analysis of Defined Benefit Pension Scheme Merger Criteria

Abstract: The conditions under which pension schemes merge is an important issue that has been under-researched. Mergers can affect the strength of the sponsor’s covenant and the balance of power between the trustees and the sponsor, as well as the scheme funding ratio. This paper sets out two financial criteria to be met by any pension scheme merger:- no profitContinue reading

Abstract: It has long been known that English Cistercian monasteries often sold their wool in advance to foreign merchants in the late thirteenth century. The abbey of Pipewell in Northamptonshire features in a number of such contracts with Cahorsin merchants. This paper looks again at these contracts in the context of over 200 other such agreements found in the governmentalContinue reading

Detecting Switching Strategies in Equity Hedge Funds

Equity hedge funds are thought to effectively operate market timing by implementing switching strategies conditional on market circumstances. In this paper we use only the reported monthly returns on a set of funds to infer the type of switching strategies they follow, if any, as well as their switching times. A set of regime-switching models for each equity hedge funds’Continue reading

Predicting Agency Rating Migrations with Spread Implied Ratings

Abstract: Investors traditionally rely on credit ratings to price debt instruments. However, rating agencies are known to be prudent in their approach to rating revisions, which results in delayed ratings adjustments to mutating credit conditions. For a large set of eurobonds we derive credit spread implied ratings and compare them with the ratings issued by rating agencies. Our results indicateContinue reading

The Spider in the Hedge

This paper provides an empirical study of the effectiveness of hedging the spider, a passive exchange traded fund (ETF) that replicates the S&P500 index. The spider is by far the largest ETF in the world: trading on the spider has grown so much during the past few years that it is now amongst the few most traded securities in theContinue reading

The Extremes of the P/E Effect

Investigations into value-based ‘anomalies’ such as the P/E effect sort shares into quintiles, or at most deciles. These are blunt instruments. We test whether most of the extra value to be found in the lower end of the P/E spectrum is to be found in the very lowest P/E shares, and whether the worst investments are in the few sharesContinue reading

Decomposing the P/E Ratio

Abstract: The price-earnings effect has been a challenge to the idea of efficient markets for many years. The P/E used has always been the ratio of the current price to the previous year’s earnings. However, the P/E is partly determined by outside influences, such as the year in which it was measured, the size of the company, and the sectorContinue reading

The Long-Term P/E Ratio

The price-earnings effect has been thoroughly documented and widely studied around the world. However, it has always been calculated on the basis of the previous year’s earnings. We show that the power of the effect has until now been seriously underestimated, due to taking too short-term a view of earnings. We look at all UK companies since 1975, and usingContinue reading

Advance Contracts for the Sale of Wool in Medieval England: An Undeveloped and Inefficient Market?

Abstract: While it is commonly believed that derivative instruments are a recent invention, we document the existence of forward contracts for the sale of wool in medieval England around 700 years ago. The contracts were generally entered into by English monasteries, who frequently sold their wool for up to twenty years in advance to mostly foreign and particularly Italian merchants.Continue reading