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Research Collection Lee Kong Chian School Of Business

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Full-Text Articles in Portfolio and Security Analysis

The Liquidity Risk Of Liquid Hedge Funds, Melvyn Teo Aug 2010

The Liquidity Risk Of Liquid Hedge Funds, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

This paper evaluates hedge funds that grantfavorable redemption terms to investors. Within this group of purportedlyliquid funds, high net inflow funds subsequently outperform low net inflowfunds by 4.79% per year after adjusting for risk. The return impact of fundflows is stronger when funds embrace liquidity risk, when market liquidity islow, and when funding liquidity, as measured by the Treasury-Eurodollar spread,aggregate hedge fund flows, and prime broker stock returns, is tight. Inkeeping with an agency explanation, funds with strong incentives to raisecapital, low manager option deltas, and no manager capital co-invested are morelikely to take on excessive liquidity risk. These results …

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Industry Recommendations: Characteristics, Investment Value, And Relation To Firm Recommendations, Ohad Kadan, Madureira Leonardo, Rong Wang, Tzachi Zach Jul 2010

Industry Recommendations: Characteristics, Investment Value, And Relation To Firm Recommendations, Ohad Kadan, Madureira Leonardo, Rong Wang, Tzachi Zach

Research Collection Lee Kong Chian School Of Business

We study analysts’ industry recommendations. We find that the distribution of industry recommendations is quite balanced. Analysts show more optimism towards industries with high levels of R&D, past profitability and past returns. Industry recommendations possess investment value as portfolios based on these recommendations generate risk-adjusted abnormal returns. Finally, industry recommendations contain information which is orthogonal to that included in firm recommendations, and more so for brokers who benchmark their firm recommendations to industry peers. Consequently, the investment value of analysts’ recommendations is enhanced when both industry and firm recommendations are used.

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Reference Point Adaptation And Disposition Effect: Evidence From Institutional Trading, Chiraphol N. Chiyachantana, Zongfei Yang Jul 2010

Reference Point Adaptation And Disposition Effect: Evidence From Institutional Trading, Chiraphol N. Chiyachantana, Zongfei Yang

Research Collection Lee Kong Chian School Of Business

Using a large proprietary database of institutional trades, we investigate whether, and to what extent, the dynamic adaptation of reference point translates into variations in the disposition effect, and establish three key results. First, the propensity to realize losses declines sharply with the magnitude of prior losses due to insufficient adaptation of reference point. Second, recent adverse information accelerates investors’ adaptation to price depreciation and increases investors’ willingness to realize losses. Finally, a priori of losing money in highly speculative investments decreases investors’ aversion to realize losses. Collectively, the findings suggest that both prior outcomes and recent expectations contribute to …

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Investor Diversification And The Pricing Of Idiosyncratic Risk, Fangjian Fu Jul 2010

Investor Diversification And The Pricing Of Idiosyncratic Risk, Fangjian Fu

Research Collection Lee Kong Chian School Of Business

Theories predict that, due to investor under-diversification, idiosyncratic risk is positively priced in expected stock returns. Empirical studies based on various methodologies yield mixed evidence. This study circumvents the debate on methodological issues and traces the pricing of idiosyncratic risk to its economic source – investor under-diversification. Assuming that institutional investors tend to hold more diversified portfolios and thus care little about idiosyncratic risk relative to individual investors, we find that the positive relation between idiosyncratic risk and stock returns is significantly stronger (weaker) in stocks that are held and traded more by individual (institutional) investors. In addition, the pricing …

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How Predictable Is The Chinese Stock Market?, Fuwei Jiang, David E. Rapach, Jack K. Strauss, Jun Tu Jul 2010

How Predictable Is The Chinese Stock Market?, Fuwei Jiang, David E. Rapach, Jack K. Strauss, Jun Tu

Research Collection Lee Kong Chian School Of Business

We analyze return predictability for the Chinese stock market, including the aggregate market portfolio and the components of the aggregate market, such as portfolios sorted on industry, size, book-to-market and ownership concentration. Considering a variety of economic variables as predictors, both in-sample and out-of-sample tests highlight significant predictability in the aggregate market portfolio of the Chinese stock market and substantial differences in return predictability across components. Among industry portfolios, Finance and insurance, Real estate, and Service exhibit the most predictability, while portfolios of small-cap and low ownership concentration firms also display considerable predictability. Two key findings provide economic explanations for …

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Pricing Options In An Extended Black Scholes Economy With Illiquidity: Theory And Empirical Evidence, Umut Cetin, Robert Jarrow, Mitchell Protter, Mitchell Warachka Jun 2010

Pricing Options In An Extended Black Scholes Economy With Illiquidity: Theory And Empirical Evidence, Umut Cetin, Robert Jarrow, Mitchell Protter, Mitchell Warachka

Research Collection Lee Kong Chian School Of Business

This article studies the pricing of options in an extended Black Scholes economy in which the underlying asset is not perfectly liquid. The resulting liquidity risk is modeled as a stochastic supply curve, with the transaction price being a function of the trade size. Consistent with the market microstructure literature, the supply curve is upward sloping with purchases executed at higher prices and sales at lower prices. Optimal discrete time hedging strategies are then derived. Empirical evidence reveals a significant liquidity cost intrinsic to every option. [PUBLICATION ABSTRACT]

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An Analysis Of Extreme Price Shocks And Illiquidity Among Systematic Trend Followers, Bernard Lee, Shih-Fen Cheng, Annie Koh Jun 2010

An Analysis Of Extreme Price Shocks And Illiquidity Among Systematic Trend Followers, Bernard Lee, Shih-Fen Cheng, Annie Koh

Research Collection Lee Kong Chian School Of Business

We construct an agent-based model to study the interplay between extreme price shocks and illiquidity in the presence of systematic traders known as trend followers. The agent-based approach is particularly attractive in modeling commodity markets because the approach allows for the explicit modeling of production, capacities, and storage constraints. Our study begins by using the price stream from a market simulation involving human participants and studies the behavior of various trend-following strategies, assuming initially that their participation will not impact the market. We notice an incremental deterioration in strategy performance as and when strategies deviate further and further from the …

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Collective Investments For Pension Savings: Lessons From Singapore's Central Provident Fund Scheme, Benedict S. Koh, Olivia S. Mitchell, Joelle H. Y. Fong May 2010

Collective Investments For Pension Savings: Lessons From Singapore's Central Provident Fund Scheme, Benedict S. Koh, Olivia S. Mitchell, Joelle H. Y. Fong

Research Collection Lee Kong Chian School Of Business

Singapore's mandatory national defined contribution pension system permits participants to invest their retirement savings in a wide range of investment instruments if they wish, rather than leaving their savings in Central Provident Fund (CPF) accounts to earn interest rates by default. This article asks whether workers seeking to earn higher returns can expect to do better than the CPF-managed default, by moving their money into professionally managed unit trusts. We use historical data to investigate whether fund managers possess superior stock picking and market timing skills, as well as whether they exhibit persistence in performance and offer diversification benefits to …

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Portfolio Selection Under Distributional Uncertainty: A Relative Robust Cvar In Portfolio Management, Dashan Huang, Shushang Zhu, Frank Fabozzi, Masao Fukushima May 2010

Portfolio Selection Under Distributional Uncertainty: A Relative Robust Cvar In Portfolio Management, Dashan Huang, Shushang Zhu, Frank Fabozzi, Masao Fukushima

Research Collection Lee Kong Chian School Of Business

Robust optimization, one of the most popular topics in the field of optimization and control since the late 1990s, deals with an optimization problem involving uncertain parameters. In this paper, we consider the relative robust conditional value-at-risk portfolio selection problem where the underlying probability distribution of portfolio return is only known to belong to a certain set. Our approach not only takes into account the worst-case scenarios of the uncertain distribution, but also pays attention to the best possible decision with respect to each realization of the distribution. We also illustrate how to construct a robust portfolio with multiple experts …

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Selective Intervention And Economic Re-Engineering: Lessons Form Singapore's Parks In Indonesia And India, Caroline Yeoh, Siang Yeung Wong May 2010

Selective Intervention And Economic Re-Engineering: Lessons Form Singapore's Parks In Indonesia And India, Caroline Yeoh, Siang Yeung Wong

Research Collection Lee Kong Chian School Of Business

No abstract provided.

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Is Regime Switching In Stock Returns Important In Portfolio Decisions?, Jun Tu May 2010

Is Regime Switching In Stock Returns Important In Portfolio Decisions?, Jun Tu

Research Collection Lee Kong Chian School Of Business

The stock market displays regime switching between upturns and downturns. This paper provides a Bayesian framework for making portfolio decisions that takes this regime switching into account, together with asset pricing model uncertainty and parameter uncertainty. The findings reveal that the economic value of accounting for regimes is substantially independent of whether or not model and parameter uncertainties are incorporated: the certainty-equivalent losses associated with ignoring regime switching are generally above 2% per year and can be as high as 10%. These results suggest that the more realistic regime switching model is fundamentally different from the commonly used single-state model, …

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An Analysis Of Extreme Price Shocks And Illiquidity Among Systematic Trend Followers, Wing Bernard Lee, Shih-Fen Cheng, Annie Koh Feb 2010

An Analysis Of Extreme Price Shocks And Illiquidity Among Systematic Trend Followers, Wing Bernard Lee, Shih-Fen Cheng, Annie Koh

Research Collection Lee Kong Chian School Of Business

We construct an agent-based model to study the interplay between extreme price shocks and illiquidity in the presence of systematic traders known as trend followers. The agent-based approach is particularly attractive in modeling commodity markets because the approach allows for the explicit modeling of production, capacities, and storage constraints. Our study begins by using the price stream from a market simulation involving human participants and studies the behavior of various trend-following strategies, assuming initially that their participation will not impact the market. We notice an incremental deterioration in strategy performance as and when strategies deviate further and further from the …

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Investing Into The Abyss: The Continued Misclassification Of Multi-Sector Managed Funds, N. Allen, Kok Fai Phoon, J. Watson, J. Wickramanayake Feb 2010

Investing Into The Abyss: The Continued Misclassification Of Multi-Sector Managed Funds, N. Allen, Kok Fai Phoon, J. Watson, J. Wickramanayake

Research Collection Lee Kong Chian School Of Business

The rapid expansion in assets managed by the Australian managed fund industry has resulted in it becoming a major sector of the financial system, second only to that of the banking industry. With more than A$550 billion invested in the industry investors should be concerned about the lack of reliable information available in regard to equity style management. In particular investors should be concerned about the probable mis-match between stated objectives and the actual objectives pursued by fund managers. In this study, we apply return-based style analysis (Sharpe 1988, 1992) to investigate the style and asset allocation strategies of 50 …

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Long-Term Earnings Growth Forecasts, Limited Attention, And Return Predictability, Zhi Da, Mitchell Craig Warachka Jan 2010

Long-Term Earnings Growth Forecasts, Limited Attention, And Return Predictability, Zhi Da, Mitchell Craig Warachka

Research Collection Lee Kong Chian School Of Business

Long-term earnings expectations are critically important to stock price valuations. We identify relative optimism and relative pessimism in long-term analyst forecasts by comparing these forecasts with implied short-term earnings growth forecasts across rms within the same industry. Stocks with relatively optimistic and relatively pessimistic long-term analyst forecasts have negative and positive risk-adjusted returns, respectively. This return predictability depends critically on short-term forecasts since relative optimism and relative pessimism originate from the slow diffusion of information from short-term to long-term analyst forecasts. Our results indicate that market participants have limited attention regarding the long-term earnings implications of information.

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Strategic Financial Management: Evidence From Seasoned Equity Offerings, Michael Barclay, Fangjian Fu, Clifford Smith Jan 2010

Strategic Financial Management: Evidence From Seasoned Equity Offerings, Michael Barclay, Fangjian Fu, Clifford Smith

Research Collection Lee Kong Chian School Of Business

Extant theories of capital structure assume myopic financial managers. So they have hard time to explain the financing behavior of seasoned equity offering (SEO) firms. In contrast with the pecking order theory, SEO firms typically are financially healthy companies with significant cash balances, low leverage, and unused debt capacity. At odds with the tradeoff theory, SEOs often move firms away from, rather than closer to, their target leverage ratios. SEOs appear to be driven by capital needs associated with large investment projects rather than by market timing considerations. Firms issue debt following the SEO to finance investment further and to …

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Is Regime Switching In Stock Returns Important In Asset Allocations?, Jun Tu Jan 2010

Is Regime Switching In Stock Returns Important In Asset Allocations?, Jun Tu

Research Collection Lee Kong Chian School Of Business

The stock market displays regime switching between upturns and downturns. This paper provides a Bayesian framework for making portfolio decisions that takes this regime switching into account, together with asset pricing model uncertainty and parameter uncertainty. The findings reveal that the economic value of accounting for regimes is substantially independent of whether or not model and parameter uncertainties are incorporated: the certainty-equivalent losses associated with ignoring regime switching are generally above 2% per year, and can be as high as 10%. These results suggest that the more realistic regime switching model is fundamentally different from the commonly used single-state model, …

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Leverage Change, Debt Overhang, And Stock Prices, Jie Cai, Zhe Zhang Oct 2009

Leverage Change, Debt Overhang, And Stock Prices, Jie Cai, Zhe Zhang

Research Collection Lee Kong Chian School Of Business

We document a significant and negative effect of the change in a firm’s leverage ratio on its stock prices. We find that the negative effect is stronger for firms with a greater likelihood of debt overhang. Moreover, firms with an increase in leverage ratio tend to have less future investment. These findings are consistent with Myers' (1977) debt overhang theory that an increase in leverage may lead to future underinvestment, thus reducing a firm's value.

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Conflicts Of Interest And Stock Recommendations: The Effects Of The Global Settlement And Related Regulations, Ohad Kadan, Leonardo Madureria, Rong Wang, Tzachi Zach Oct 2009

Conflicts Of Interest And Stock Recommendations: The Effects Of The Global Settlement And Related Regulations, Ohad Kadan, Leonardo Madureria, Rong Wang, Tzachi Zach

Research Collection Lee Kong Chian School Of Business

We study the effect of the Global Analyst Research Settlement and related regulations on sell-side research. These regulations attempted to mitigate the interdependence between research and investment banking. We document that following the regulations many brokerage houses have migrated from the traditional five-tier rating system to a three-tier system. Optimistic recommendations have become less frequent and more informative, whereas neutral and pessimistic recommendations have become more frequent and less informative. Importantly, the overall informativeness of recommendations has declined. The likelihood of issuing optimistic recommendations no longer depends on affiliation with the covered firm, although affiliated analysts are still reluctant to …

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The Geography Of Hedge Funds, Melvyn Teo Sep 2009

The Geography Of Hedge Funds, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

This article analyzes the relationship between the risk-adjusted performance of hedge funds and their proximity to investments using data on Asia-focused hedge funds. I find, relative to an augmented Fung and Hsieh (2004) factor model, that hedge funds with a physical presence (head or research office) in their investment region outperform other hedge funds by 3.72% per year. The local information advantage is pervasive across all major geographical regions, but is strongest for emerging market funds and funds holding illiquid securities. These results are robust to adjustments for fund fees, serial correlation, backfill bias, and incubation bias. I show also …

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Institutional Investors And The Informational Efficiency Of Prices, Ekkehart Boehmer, Eric K. Kelley Sep 2009

Institutional Investors And The Informational Efficiency Of Prices, Ekkehart Boehmer, Eric K. Kelley

Research Collection Lee Kong Chian School Of Business

Using a broad panel of NYSE-listed stocks between 1983 and 2004, we study the relation between institutional shareholdings and the relative informational efficiency of prices, measured as deviations from a random walk. Stocks with greater institutional ownership are priced more efficiently, and we show that variation in liquidity does not drive this result. One mechanism through which prices become more efficient is institutional trading activity, even when institutions trade passively. But efficiency is also directly related to institutional holdings, even after controlling for institutional trading, analyst coverage, short selling, variation in liquidity, and firm characteristics.

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Forecast Accuracy Uncertainty And Momentum, Bing Han, Dong Hong, Mitchell Craig Warachka Jun 2009

Forecast Accuracy Uncertainty And Momentum, Bing Han, Dong Hong, Mitchell Craig Warachka

Research Collection Lee Kong Chian School Of Business

We demonstrate that stock price momentum and earnings momentum can result from uncertainty surrounding the accuracy of cash flow forecasts. Our model has multiple information sources issuing cash flow forecasts for a stock. The investor combines these forecasts into an aggregate cash flow estimate that has minimal mean-squared forecast error. This aggregate estimate weights each cash flow forecast by the estimated accuracy of its issuer, which is obtained from their past forecast errors. Momentum arises from the investor gradually learning about the relative accuracy of the information sources and updating their weights. Empirical tests validate the model's prediction of stronger …

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Institutional Trading Frictions, Chiraphol New Chiyachantana, Pankaj K. Jain May 2009

Institutional Trading Frictions, Chiraphol New Chiyachantana, Pankaj K. Jain

Research Collection Lee Kong Chian School Of Business

We propose and empirically examine a comprehensive measure of institutional trading frictions to include the dimensions of price impact, quantity of execution, return dynamics, speed of execution or order splitting, and trading commissions. Our empirical analysis reveals that various hidden components of institutional trading frictions such as adverse selection and clean-up costs are persistent and could add significantly to previously measured directly observable components of transaction costs. Our simultaneous system of equations accounts for the endogeniety in institutional order aggressiveness based on potentially superior information as well as order splitting strategies in the implementation stage to reduce transaction costs. Order …

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Extreme Events And The Copula Pricing Of Commercial Mortgage-Backed Securities, Zhanyong Liu, Gang-Zhi Fan, Kian Guan Lim Apr 2009

Extreme Events And The Copula Pricing Of Commercial Mortgage-Backed Securities, Zhanyong Liu, Gang-Zhi Fan, Kian Guan Lim

Research Collection Lee Kong Chian School Of Business

Commercial mortgage-backed securities (CMBS), as a portfolio-based financial product, have gained great popularity in financial markets. This paper extends Childs, Ott and Riddiough’s (J Financ Quant Anal, 31(4), 581–603, 1996) model by proposing a copula-based methodology for pricing CMBS bonds. Default on underlying commercial mortgages within a pool is a crucial risk associated with CMBS transactions. Two important issues associated with such default—extreme events and default dependencies among the mortgages—have been identified to play crucial roles in determining credit risk in the pooled commercial mortgage portfolios. This article pays particular attention to these two issues in pricing CMBS bonds. Our …

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Institutional Investors And Equity Returns: Are Short-Term Institutions Better Informed?, Xuemin (Sterling) Yan, Zhe Zhang Feb 2009

Institutional Investors And Equity Returns: Are Short-Term Institutions Better Informed?, Xuemin (Sterling) Yan, Zhe Zhang

Research Collection Lee Kong Chian School Of Business

We show that the positive relation between institutional ownership and future stock returns documented in Gompers and Metrick (2001) is driven by short-term institutions. Furthermore, short-term institutions' trading forecasts future stock returns. This predictability does not reverse in the long run and is stronger for small and growth stocks. Short-term institutions' trading is also positively related to future earnings surprises. By contrast, long-term institutions' trading does not forecast future returns, nor is it related to future earnings news. Our results are consistent with the view that short-term institutions are better informed and they trade actively to exploit their informational advantage.

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Institutional Investors, Past Performance, And Dynamic Loss Aversion, Paul G. J. O'Connell, Melvyn Teo Feb 2009

Institutional Investors, Past Performance, And Dynamic Loss Aversion, Paul G. J. O'Connell, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

Using a proprietary database of currency trades, this paper explores the effects of trading gains and losses on risk-taking among large institutional investors. We find that institutional investors, unlike individuals, are not prone to the disposition effect. Instead, institutions aggressively reduce risk following losses and mildly increase risk following gains. This asymmetry is more pronounced later in the calendar year and among older and more experienced funds. We show that such performance dependence is consistent with dynamic loss aversion (Barberis, Huang, and Santos (2001)) and overconfidence. In addition, prior institutional gains and losses have palpable implications for future prices.

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Using High-Frequency Transaction Data To Estimate The Probability Of Informed Trading, Anthony S. Tay, Christopher Ting, Yiu Kuen Tse, Mitchell Craig Warachka Feb 2009

Using High-Frequency Transaction Data To Estimate The Probability Of Informed Trading, Anthony S. Tay, Christopher Ting, Yiu Kuen Tse, Mitchell Craig Warachka

Research Collection Lee Kong Chian School Of Business

This paper applies the asymmetric autoregressive conditional duration (AACD) model of Bauwens and Giot (2003) to estimate the probability of informed trading (PIN) using irregularly spaced transaction data. We model trade direction (buy versus sell orders) and the duration between trades jointly. Unlike the Easley, Hvidkjaer, and O'Hara(2002) approach, which uses the aggregate numbers of daily buy and sell orders to estimate PIN, our methodology allows for interactions between consecutive buy-sell orders and accounts for the duration between trades and the volume of trade. We extend the Easley-Hvidkjaer-O'Hara framework by allowing the probabilities of good news and bad news to …

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The Performance Of Reverse Leveraged Buyouts, Jerry Cao, Josh Lerner Feb 2009

The Performance Of Reverse Leveraged Buyouts, Jerry Cao, Josh Lerner

Research Collection Lee Kong Chian School Of Business

Reverse leveraged buyouts (RLBOs) have received increased public scrutiny but attracted little systematic study. We collect a comprehensive sample of 526 RLBOs between 1981 and 2003 and examine the three-year and five-year stock performance of these offerings. RLBOs appear to perform as well as or better than other initial public offerings and the stock market as a whole, depending on the specification. Evidence exists of a deterioration of returns over time.

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Idiosyncratic Risk And The Cross-Section Of Expected Stock Returns, Fangjian Fu Jan 2009

Idiosyncratic Risk And The Cross-Section Of Expected Stock Returns, Fangjian Fu

Research Collection Lee Kong Chian School Of Business

Theories such as Merton (1987, Journal of Finance) predict a positive relation between idiosyncratic risk and expected return when investors do not diversify their portfolio. Ang, Hodrick, Xing, and Zhang (2006, Journal of Finance 61, 259-299) however find that monthly stock returns are negatively related to the one-month lagged idiosyncratic volatilities. I show that idiosyncratic volatilities are time-varying and thus their findings should not be used to imply the relation between idiosyncratic risk and expected return. Using the exponential GARCH models to estimate expected idiosyncratic volatilities, I find a significantly positive relation between the estimated conditional idiosyncratic volatilities and expected …

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Investor Reaction To Women Directors, E. Kang, David K. Ding, C. Charoenwong Jan 2009

Investor Reaction To Women Directors, E. Kang, David K. Ding, C. Charoenwong

Research Collection Lee Kong Chian School Of Business

Existing studies on women directorships present equivocal results on the association between appointing women directors and firm performance. These studies tend to focus on western countries and largely ignore investors' reactions to such appointments. This paper applies the financial event study method and finds that investors generally respond positively to the appointment of women directors in Singaporean firms. Regression analyses also reveal that investors are most receptive when the women are independent directors and are least receptive when the directors assume the CEO role. This study not only tests the theory of gender diversity in an Asian context but also …

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Business Aggression, Institutional Loans, And Credit Crisis: Evidence From Lending Practices In Leveraged Buyouts, Xiaping Jerry Cao, Wei-Ling Song, Joe Mason Jan 2009

Business Aggression, Institutional Loans, And Credit Crisis: Evidence From Lending Practices In Leveraged Buyouts, Xiaping Jerry Cao, Wei-Ling Song, Joe Mason

Research Collection Lee Kong Chian School Of Business

This paper investigates the lending practices related to leverage buyouts (LBOs) market between high and low write-down institutions. The write-downs, which are a proxy for business aggression of institutions, are mainly related to credit crisis from the beginning of 2007 to August 10, 2008. We find that high (low) write-down institutions increase (decrease) loan market share dramatically during the period of 2001-2006. The increase is mainly driven by the segment of loans sold to institutional investors, such as collateralized loan obligations vehicle, hedge fund, and insurance companies. Institutional loans originated by high write-down institutions carry significantly fewer covenants and higher …

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