... We compare the results obtained in continuously compounded returns to those in arithmetic ret... more ... We compare the results obtained in continuously compounded returns to those in arithmetic returns as well. We consider three downside beta risk measures: Hogan and Warren (1974) beta, Harlow and Rao (1989) beta and Estrada (2002) beta. ...
Mutual fund is a popular investment vehicle for investors. Investors usually judge fund manager p... more Mutual fund is a popular investment vehicle for investors. Investors usually judge fund manager performance relative to target benchmarks. Fund managers, on the other hand, are interested in knowing how/why they perform well or poorly relative to their peers in different aspects of fund management as well. To acquire more insights about this issue and design a comprehensive performance measure, fund management function is conceptualised as a three-stage production process. To assess overall and stagelevel performance, a network data envelopment analysis model is developed. The stage-level processes are deemed to operate under two different environmental conditions-levels of risk exposure. Operation under different levels of risk exposure is modelled through conditions imposed on the intermediate measures. A new index proposed to assess linkage performance is demonstrated empirically to improve discriminatory power of performance. Further applications of the proposed model are discussed.
This paper uses various model dependent and model independent measures of idiosyncratic volatilit... more This paper uses various model dependent and model independent measures of idiosyncratic volatility and investigates features and patterns of idiosyncratic volatility in Malaysia. The results reveal that there is no discernible trend in idiosyncratic volatility. However, there is evidence of episodic-phenomenon. During recession and crisis periods, idiosyncratic volatility tends to be higher than in the other periods due to the high correlation between idiosyncratic volatility of firms in such periods. Small firms and low priced stocks appear to influence idiosyncratic volatility more than the large firms and high priced stocks. Market volatility and firm volatility may not predict economic growth.
Financial markets and portfolio management, Jun 22, 2010
(1) Background: Evidence regarding scarlet fever and its relationship with meteorological, includ... more (1) Background: Evidence regarding scarlet fever and its relationship with meteorological, including air pollution factors, is not very available. This study aimed to examine the relationship between ambient air pollutants and meteorological factors with scarlet fever occurrence in Beijing, China. (2) Methods: A retrospective ecological study was carried out to distinguish the epidemic characteristics of scarlet fever incidence in Beijing districts from 2013 to 2014. Daily incidence and corresponding air pollutant and meteorological data were used to develop the model. Global Moran's I statistic and Anselin's local Moran's I (LISA) were applied to detect the spatial autocorrelation (spatial dependency) and clusters of scarlet fever incidence. The spatial lag model (SLM) and spatial error model (SEM) including ordinary least squares (OLS) models were then applied to probe the association between scarlet fever incidence and meteorological including air pollution factors. (3) Results: Among the 5491 cases, more than half (62%) were male, and more than one-third (37.8%) were female, with the annual average incidence rate 14.64 per 100,000 population. Spatial autocorrelation analysis exhibited the existence of spatial dependence; therefore, we applied spatial regression models. After comparing the values of R-square, log-likelihood and the Akaike information criterion (AIC) among the three models, the OLS model (R 2 = 0.0741, log likelihood = −1819.69, AIC = 3665.38), SLM (R 2 = 0.0786, log likelihood = −1819.04, AIC = 3665.08) and SEM (R 2 = 0.0743, log likelihood = −1819.67, AIC = 3665.36), identified that the spatial lag model (SLM) was best for model fit for the regression model. There was a positive significant association between nitrogen oxide (p = 0.027), rainfall (p = 0.036) and sunshine hour (p = 0.048), while the relative humidity (p = 0.034) had an adverse association with scarlet fever incidence in SLM. (4) Conclusions: Our findings indicated that meteorological, as well as air pollutant factors may increase the incidence of scarlet fever; these findings may help to guide scarlet fever control programs and targeting the intervention.
ABSTRACT We show analytically that the cross-sectional relation between idiosyncratic volatility ... more ABSTRACT We show analytically that the cross-sectional relation between idiosyncratic volatility estimated as the variance of the residuals in a single factor model and expected stock return may be represented by a truncated parabola that opens to the left and has horizontal axis. This relation is uncovered for stocks of similar volatility and no abnormal return estimated in the factor model. The sensitivity of the relation between idiosyncratic volatility and expected stock return to these restrictions are discussed. Our findings may be extended to the multi-factor case as well. A non-linear inverse relation between idiosyncratic volatility and expected return is more likely to be observed when portfolios are formed controlling for abnormal return and total risk. Our interpretation of the idiosyncratic volatility and expected return relation help explain the inconsistency in the cross-sectional relation between idiosyncratic volatility and expected stock return observed in empirical studies. We provide empirical evidence to suggest that the relation between (i) idiosyncratic volatility and expected return is generally positive and is robust to the portfolio formation scheme and sample period and (ii) lagged idiosyncratic volatility and expected return is sensitive to the sample period.
This paper provides a review of the main features of asset pricing models. The review includes si... more This paper provides a review of the main features of asset pricing models. The review includes single-factor and multifactor models, extended forms of the Capital Asset Pricing Model (CAPM) with higher order co-moments, and asset pricing models conditional on time-varying volatility.
ABSTRACT Superannuation funds (SFs) offer pension programmes in Australia. Generally, employers m... more ABSTRACT Superannuation funds (SFs) offer pension programmes in Australia. Generally, employers must pay money in to an SF account in the name of their employees and employees have the freedom to select an SF of their choice. In this paper, we determine how efficiently SFs manage disbursements (costs, fees and expenses) and risk in generating returns to investors from 2017 to 2019. We introduce two measures (disbursement utilization and risk utilization) under the data envelopment analysis (DEA) methodological framework to compare disbursements and risk management performance in relation to overall management performance. The average disbursements utilization is 0.26 and risk utilization is 0.94. On average, more than 80% reduction in disbursements is required to gain disbursement efficiency whereas the average risk reduction required to gain risk-efficiency is less than 20%. No individual SF is disbursement efficient in all five sampled years. Generally, SFs manage disbursements poorly compared to risk in return generation. Variation in fees charged by managed funds is an industry-wide concern. Therefore, how funds manage disbursements is an important consideration for investors. The evidence highlights SF managers the need to pay attention to disbursements management in their pursuit of excellence in overall fund management performance.
Ima Journal of Management Mathematics, Jan 12, 2022
In this paper, we formulate an inverse data envelopment analysis (DEA) model for a serially linke... more In this paper, we formulate an inverse data envelopment analysis (DEA) model for a serially linked two-stage production process operating under constant returns to scale technology. The inverse DEA model determines a set of intermediate and output targets for an input augmented decision-making unit (DMU) to maintain its relative efficiency at a pre-specified level. We solve the inverse DEA model using the constraint method used in multi-objective optimization. The input augmented DMU with intermediate and output targets obtained in the inverse DEA model is a hypothetical DMU. Under our modelling framework, when such a hypothetical DMU established on an inefficient DMU is included in the observed DMU set, the frontier established with observed DMU set remains intact. This is important in practice as the intermediate and output targets of the hypothetical DMU would be feasible. When overall efficiency of the hypothetical DMU is decomposed, individual stages have the same efficiency level as that of the hypothetical DMU. This is important to DMU managers as sub-processes also maintain the desired overall efficiency level. We apply our inverse DEA model to a sample of Australian superannuation funds. We demonstrate that each unique Pareto optimal solution of the inverse DEA model obtained through the constraint method provides a specific set of intermediate and output targets and they may offer trade-off between intermediates and outputs. When fund managers anticipate expansion or growth in their funds, choice of targets allows comparison of different trade-off scenarios and makes informed decisions.
This paper investigates association between portfolio returns and higher-order systematic co-mome... more This paper investigates association between portfolio returns and higher-order systematic co-moments at different timescales obtained through wavelet multiscaling-a technique that decomposes a given return series into different timescales enabling investigation at different return intervals. For some portfolios, the relative risk positions indicated by systematic co-moments at higher timescales is different from those revealed in raw returns. A strong positive (negative) linear association between beta and co-kurtosis and portfolio return in the up (down) market is observed in raw returns and at different timescales. The beta risk is priced in the up and down markets and the co-kurtosis is not. Co-skewness does not appear to be linearly associated with portfolio returns even after the up and down market split and is not priced.
In this paper, we relate security returns in the thirty securities in the Dow Jones index to regi... more In this paper, we relate security returns in the thirty securities in the Dow Jones index to regime shifts in the market portfolio (S&P500) volatility. We model market volatility as a multiple-state Markov switching process of order one and estimate non-diversifiable security risk (beta) in the different market volatility regimes. We test the significance of the premium of the beta risk associated with the different market regimes and find evidence of a relationship between security return and beta risk when conditional on the up and down market movement.
Page 1. 1 Modelling time-varying downside risk Don UA Galagedera* and Asmah M. Jaapar** Abstract ... more Page 1. 1 Modelling time-varying downside risk Don UA Galagedera* and Asmah M. Jaapar** Abstract This paper estimates time-varying systematic downside risk using a parametric specification (BEKK model) and a nonparametric procedure (rolling window technique). ...
This paper investigates association between portfolio returns and higher-order systematic co-mome... more This paper investigates association between portfolio returns and higher-order systematic co-moments at different timescales obtained through wavelet multiscaling-a technique that decomposes a given return series into different timescales enabling investigation at different return intervals. For some portfolios, the relative risk positions indicated by systematic co-moments at higher timescales is different from those revealed in raw returns. A strong positive (negative) linear association between beta and co-kurtosis and portfolio return in the up (down) market is observed in raw returns and at different timescales. The beta risk is priced in the up and down markets and the co-kurtosis is not. Co-skewness does not appear to be linearly associated with portfolio returns even after the up and down market split and is not priced.
For emerging market returns there is strong evidence that the departure from normality is primari... more For emerging market returns there is strong evidence that the departure from normality is primarily driven by kurtosis and not skewness. This paper investigates the empirical validity of a return generating process that includes quadratic and cubic market returns as factors of pricing for an emerging market. Following Barone-Adesi et al. (2004) a multivariate test of a three-moment pricing model is developed. The empirical evidence in the market returns support the stylized facts typical for an emerging market and reveal that any return generating process that includes only a quadratic term (coskewness) may be misspecified. However comparison of higher order market return factors with Fama French factors indicates that while risk exposure to these higher order co-moments factors especially cokurtosis is important the co-moments do not possess sufficient explanatory power to render Fama French factor redundant. Comments and suggestions from the participants of the 12 doctoral research conference Faculty of Business and Economics Monash University and ESAM 07 are thankfully acknowledged.
... We compare the results obtained in continuously compounded returns to those in arithmetic ret... more ... We compare the results obtained in continuously compounded returns to those in arithmetic returns as well. We consider three downside beta risk measures: Hogan and Warren (1974) beta, Harlow and Rao (1989) beta and Estrada (2002) beta. ...
Mutual fund is a popular investment vehicle for investors. Investors usually judge fund manager p... more Mutual fund is a popular investment vehicle for investors. Investors usually judge fund manager performance relative to target benchmarks. Fund managers, on the other hand, are interested in knowing how/why they perform well or poorly relative to their peers in different aspects of fund management as well. To acquire more insights about this issue and design a comprehensive performance measure, fund management function is conceptualised as a three-stage production process. To assess overall and stagelevel performance, a network data envelopment analysis model is developed. The stage-level processes are deemed to operate under two different environmental conditions-levels of risk exposure. Operation under different levels of risk exposure is modelled through conditions imposed on the intermediate measures. A new index proposed to assess linkage performance is demonstrated empirically to improve discriminatory power of performance. Further applications of the proposed model are discussed.
This paper uses various model dependent and model independent measures of idiosyncratic volatilit... more This paper uses various model dependent and model independent measures of idiosyncratic volatility and investigates features and patterns of idiosyncratic volatility in Malaysia. The results reveal that there is no discernible trend in idiosyncratic volatility. However, there is evidence of episodic-phenomenon. During recession and crisis periods, idiosyncratic volatility tends to be higher than in the other periods due to the high correlation between idiosyncratic volatility of firms in such periods. Small firms and low priced stocks appear to influence idiosyncratic volatility more than the large firms and high priced stocks. Market volatility and firm volatility may not predict economic growth.
Financial markets and portfolio management, Jun 22, 2010
(1) Background: Evidence regarding scarlet fever and its relationship with meteorological, includ... more (1) Background: Evidence regarding scarlet fever and its relationship with meteorological, including air pollution factors, is not very available. This study aimed to examine the relationship between ambient air pollutants and meteorological factors with scarlet fever occurrence in Beijing, China. (2) Methods: A retrospective ecological study was carried out to distinguish the epidemic characteristics of scarlet fever incidence in Beijing districts from 2013 to 2014. Daily incidence and corresponding air pollutant and meteorological data were used to develop the model. Global Moran's I statistic and Anselin's local Moran's I (LISA) were applied to detect the spatial autocorrelation (spatial dependency) and clusters of scarlet fever incidence. The spatial lag model (SLM) and spatial error model (SEM) including ordinary least squares (OLS) models were then applied to probe the association between scarlet fever incidence and meteorological including air pollution factors. (3) Results: Among the 5491 cases, more than half (62%) were male, and more than one-third (37.8%) were female, with the annual average incidence rate 14.64 per 100,000 population. Spatial autocorrelation analysis exhibited the existence of spatial dependence; therefore, we applied spatial regression models. After comparing the values of R-square, log-likelihood and the Akaike information criterion (AIC) among the three models, the OLS model (R 2 = 0.0741, log likelihood = −1819.69, AIC = 3665.38), SLM (R 2 = 0.0786, log likelihood = −1819.04, AIC = 3665.08) and SEM (R 2 = 0.0743, log likelihood = −1819.67, AIC = 3665.36), identified that the spatial lag model (SLM) was best for model fit for the regression model. There was a positive significant association between nitrogen oxide (p = 0.027), rainfall (p = 0.036) and sunshine hour (p = 0.048), while the relative humidity (p = 0.034) had an adverse association with scarlet fever incidence in SLM. (4) Conclusions: Our findings indicated that meteorological, as well as air pollutant factors may increase the incidence of scarlet fever; these findings may help to guide scarlet fever control programs and targeting the intervention.
ABSTRACT We show analytically that the cross-sectional relation between idiosyncratic volatility ... more ABSTRACT We show analytically that the cross-sectional relation between idiosyncratic volatility estimated as the variance of the residuals in a single factor model and expected stock return may be represented by a truncated parabola that opens to the left and has horizontal axis. This relation is uncovered for stocks of similar volatility and no abnormal return estimated in the factor model. The sensitivity of the relation between idiosyncratic volatility and expected stock return to these restrictions are discussed. Our findings may be extended to the multi-factor case as well. A non-linear inverse relation between idiosyncratic volatility and expected return is more likely to be observed when portfolios are formed controlling for abnormal return and total risk. Our interpretation of the idiosyncratic volatility and expected return relation help explain the inconsistency in the cross-sectional relation between idiosyncratic volatility and expected stock return observed in empirical studies. We provide empirical evidence to suggest that the relation between (i) idiosyncratic volatility and expected return is generally positive and is robust to the portfolio formation scheme and sample period and (ii) lagged idiosyncratic volatility and expected return is sensitive to the sample period.
This paper provides a review of the main features of asset pricing models. The review includes si... more This paper provides a review of the main features of asset pricing models. The review includes single-factor and multifactor models, extended forms of the Capital Asset Pricing Model (CAPM) with higher order co-moments, and asset pricing models conditional on time-varying volatility.
ABSTRACT Superannuation funds (SFs) offer pension programmes in Australia. Generally, employers m... more ABSTRACT Superannuation funds (SFs) offer pension programmes in Australia. Generally, employers must pay money in to an SF account in the name of their employees and employees have the freedom to select an SF of their choice. In this paper, we determine how efficiently SFs manage disbursements (costs, fees and expenses) and risk in generating returns to investors from 2017 to 2019. We introduce two measures (disbursement utilization and risk utilization) under the data envelopment analysis (DEA) methodological framework to compare disbursements and risk management performance in relation to overall management performance. The average disbursements utilization is 0.26 and risk utilization is 0.94. On average, more than 80% reduction in disbursements is required to gain disbursement efficiency whereas the average risk reduction required to gain risk-efficiency is less than 20%. No individual SF is disbursement efficient in all five sampled years. Generally, SFs manage disbursements poorly compared to risk in return generation. Variation in fees charged by managed funds is an industry-wide concern. Therefore, how funds manage disbursements is an important consideration for investors. The evidence highlights SF managers the need to pay attention to disbursements management in their pursuit of excellence in overall fund management performance.
Ima Journal of Management Mathematics, Jan 12, 2022
In this paper, we formulate an inverse data envelopment analysis (DEA) model for a serially linke... more In this paper, we formulate an inverse data envelopment analysis (DEA) model for a serially linked two-stage production process operating under constant returns to scale technology. The inverse DEA model determines a set of intermediate and output targets for an input augmented decision-making unit (DMU) to maintain its relative efficiency at a pre-specified level. We solve the inverse DEA model using the constraint method used in multi-objective optimization. The input augmented DMU with intermediate and output targets obtained in the inverse DEA model is a hypothetical DMU. Under our modelling framework, when such a hypothetical DMU established on an inefficient DMU is included in the observed DMU set, the frontier established with observed DMU set remains intact. This is important in practice as the intermediate and output targets of the hypothetical DMU would be feasible. When overall efficiency of the hypothetical DMU is decomposed, individual stages have the same efficiency level as that of the hypothetical DMU. This is important to DMU managers as sub-processes also maintain the desired overall efficiency level. We apply our inverse DEA model to a sample of Australian superannuation funds. We demonstrate that each unique Pareto optimal solution of the inverse DEA model obtained through the constraint method provides a specific set of intermediate and output targets and they may offer trade-off between intermediates and outputs. When fund managers anticipate expansion or growth in their funds, choice of targets allows comparison of different trade-off scenarios and makes informed decisions.
This paper investigates association between portfolio returns and higher-order systematic co-mome... more This paper investigates association between portfolio returns and higher-order systematic co-moments at different timescales obtained through wavelet multiscaling-a technique that decomposes a given return series into different timescales enabling investigation at different return intervals. For some portfolios, the relative risk positions indicated by systematic co-moments at higher timescales is different from those revealed in raw returns. A strong positive (negative) linear association between beta and co-kurtosis and portfolio return in the up (down) market is observed in raw returns and at different timescales. The beta risk is priced in the up and down markets and the co-kurtosis is not. Co-skewness does not appear to be linearly associated with portfolio returns even after the up and down market split and is not priced.
In this paper, we relate security returns in the thirty securities in the Dow Jones index to regi... more In this paper, we relate security returns in the thirty securities in the Dow Jones index to regime shifts in the market portfolio (S&P500) volatility. We model market volatility as a multiple-state Markov switching process of order one and estimate non-diversifiable security risk (beta) in the different market volatility regimes. We test the significance of the premium of the beta risk associated with the different market regimes and find evidence of a relationship between security return and beta risk when conditional on the up and down market movement.
Page 1. 1 Modelling time-varying downside risk Don UA Galagedera* and Asmah M. Jaapar** Abstract ... more Page 1. 1 Modelling time-varying downside risk Don UA Galagedera* and Asmah M. Jaapar** Abstract This paper estimates time-varying systematic downside risk using a parametric specification (BEKK model) and a nonparametric procedure (rolling window technique). ...
This paper investigates association between portfolio returns and higher-order systematic co-mome... more This paper investigates association between portfolio returns and higher-order systematic co-moments at different timescales obtained through wavelet multiscaling-a technique that decomposes a given return series into different timescales enabling investigation at different return intervals. For some portfolios, the relative risk positions indicated by systematic co-moments at higher timescales is different from those revealed in raw returns. A strong positive (negative) linear association between beta and co-kurtosis and portfolio return in the up (down) market is observed in raw returns and at different timescales. The beta risk is priced in the up and down markets and the co-kurtosis is not. Co-skewness does not appear to be linearly associated with portfolio returns even after the up and down market split and is not priced.
For emerging market returns there is strong evidence that the departure from normality is primari... more For emerging market returns there is strong evidence that the departure from normality is primarily driven by kurtosis and not skewness. This paper investigates the empirical validity of a return generating process that includes quadratic and cubic market returns as factors of pricing for an emerging market. Following Barone-Adesi et al. (2004) a multivariate test of a three-moment pricing model is developed. The empirical evidence in the market returns support the stylized facts typical for an emerging market and reveal that any return generating process that includes only a quadratic term (coskewness) may be misspecified. However comparison of higher order market return factors with Fama French factors indicates that while risk exposure to these higher order co-moments factors especially cokurtosis is important the co-moments do not possess sufficient explanatory power to render Fama French factor redundant. Comments and suggestions from the participants of the 12 doctoral research conference Faculty of Business and Economics Monash University and ESAM 07 are thankfully acknowledged.
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