Recent literature supports the pricing of higher-order systematic co-moments of returns. This paper provides some support for the quadratic-market model that is consistent with the three-moment CAPM in explaining time-series returns of the winner and the smallest size portfolios. This study further uses three innovative methodologies in analysing the ability of the linear CAPM, the quadratic- and the cubic-market models in predicting one-period- ahead returns on individual stocks, equally- and value-weighted portfolios of momentum, size and country sorts. The results are surprising but important that the higher-moment CAPM market models do not outperform the linear CAPM in the return predictability tests.
{"title":"Return Explanatory Ability and Predictability of Non-Linear Market Models","authors":"C. Hung","doi":"10.2139/ssrn.1005138","DOIUrl":"https://doi.org/10.2139/ssrn.1005138","url":null,"abstract":"Recent literature supports the pricing of higher-order systematic co-moments of returns. This paper provides some support for the quadratic-market model that is consistent with the three-moment CAPM in explaining time-series returns of the winner and the smallest size portfolios. This study further uses three innovative methodologies in analysing the ability of the linear CAPM, the quadratic- and the cubic-market models in predicting one-period- ahead returns on individual stocks, equally- and value-weighted portfolios of momentum, size and country sorts. The results are surprising but important that the higher-moment CAPM market models do not outperform the linear CAPM in the return predictability tests.","PeriodicalId":443277,"journal":{"name":"Durham Business School Research Paper Series","volume":"56 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-08-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123442248","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In light of investor "home-bias" and recent changes in the characteristics of equity markets around the world, this paper appraises the potential benefits of domestic equity diversification, as an alternative to international diversification. We construct forward-looking "home-made" diversification portfolios to imitate each of thirty-seven foreign equity indices and a world portfolio over a ten-year period. The results show that it is possible to mimic foreign indices with domestic equity assets more than previously reported. The differences in pay-offs from international and domestic portfolios are statistically and economically insignificant. Therefore, investors are not compensated for extra risks attached to international diversification.
{"title":"Why Diversify Internationally When Domestic Diversification Provides Similar Benefits?","authors":"Antonios Antoniou, O. Olusi, K. Paudyal","doi":"10.2139/ssrn.936637","DOIUrl":"https://doi.org/10.2139/ssrn.936637","url":null,"abstract":"In light of investor \"home-bias\" and recent changes in the characteristics of equity markets around the world, this paper appraises the potential benefits of domestic equity diversification, as an alternative to international diversification. We construct forward-looking \"home-made\" diversification portfolios to imitate each of thirty-seven foreign equity indices and a world portfolio over a ten-year period. The results show that it is possible to mimic foreign indices with domestic equity assets more than previously reported. The differences in pay-offs from international and domestic portfolios are statistically and economically insignificant. Therefore, investors are not compensated for extra risks attached to international diversification.","PeriodicalId":443277,"journal":{"name":"Durham Business School Research Paper Series","volume":"47 4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2006-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130666083","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Many structural models have attempted to explain the behaviour of exchange rates under the floating rate regime. Meese and Rogoff (1983) found that a random walk model performs at least as well as various structural and time series models for exchange rates in terms of out-of-sample forecast. But, the random walk model is often rejected when the variance-ratio test is employed. In this paper, we attempt to resolve these apparently contradictory empirical findings. Our view is that (i) when a model successfully passes a battery of independent out-of-sample tests, it is likely to describe the true process, and (ii) apart from the fact that the variance-ratio test is inherently an in-sample test, it might be possible that researchers fail to take into account all the relevant characteristics of the process when conducting the variance-ratio test. One characteristic we will focus on in this paper is possible structural breaks in the exchange rate process. We consider a simple random walk process, a special case of the Martingale model, which exhibits a deterministic break in its drift term, for instance, from positive to negative. This particular example can be a plausible model for a time series on exchange rates which displays a persistent currency appreciation period followed by a long depreciation era. We demonstrate both theoretically and by simulation that when the standard variance-ratio test is applied to this process, the phenomenon of spurious rejections of the Martingale hypothesis can occur. We discuss some implication of this finding on the previously uncovered empirical evidence against the Martingale hypothesis for exchange rates. We propose a modification of the variance-ratio test taking into account structural breaks in the process. We have found that the standard tests strongly reject the Martingale hypothesis while our tests do not. Our empirical findings strongly indicate that rejecting the Martingale hypothesis by the standard variance-ratio tests might have been induced by failing to incorporate structural breaks into the testing procedure.
{"title":"Revisiting the Martingale Hypothesis for Exchange Rates","authors":"Young-Sook Lee, Tae-Hwan Kim, P. Newbold","doi":"10.2139/ssrn.686708","DOIUrl":"https://doi.org/10.2139/ssrn.686708","url":null,"abstract":"Many structural models have attempted to explain the behaviour of exchange rates under the floating rate regime. Meese and Rogoff (1983) found that a random walk model performs at least as well as various structural and time series models for exchange rates in terms of out-of-sample forecast. But, the random walk model is often rejected when the variance-ratio test is employed. In this paper, we attempt to resolve these apparently contradictory empirical findings. Our view is that (i) when a model successfully passes a battery of independent out-of-sample tests, it is likely to describe the true process, and (ii) apart from the fact that the variance-ratio test is inherently an in-sample test, it might be possible that researchers fail to take into account all the relevant characteristics of the process when conducting the variance-ratio test. One characteristic we will focus on in this paper is possible structural breaks in the exchange rate process. We consider a simple random walk process, a special case of the Martingale model, which exhibits a deterministic break in its drift term, for instance, from positive to negative. This particular example can be a plausible model for a time series on exchange rates which displays a persistent currency appreciation period followed by a long depreciation era. We demonstrate both theoretically and by simulation that when the standard variance-ratio test is applied to this process, the phenomenon of spurious rejections of the Martingale hypothesis can occur. We discuss some implication of this finding on the previously uncovered empirical evidence against the Martingale hypothesis for exchange rates. We propose a modification of the variance-ratio test taking into account structural breaks in the process. We have found that the standard tests strongly reject the Martingale hypothesis while our tests do not. Our empirical findings strongly indicate that rejecting the Martingale hypothesis by the standard variance-ratio tests might have been induced by failing to incorporate structural breaks into the testing procedure.","PeriodicalId":443277,"journal":{"name":"Durham Business School Research Paper Series","volume":"73 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2004-12-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114153654","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the reorganization of a financially distressed firm when public debt-holders are uninformed about future profitability of its projects. With large expected NPV of the continuation project, exchange offers restructure the public debt. Low NPV results in liquidation. For intermediate ranges of NPV, the bank refinances the short-term public debt. We show that the signaling requirements of exchange offers imply additional equity to the firm's shareholders in violation of the Absolute Priority Rule. Our analysis derives testable hypothesis relating the nature of workouts and the magnitude of APR violations to observables such as the short term public debt.
{"title":"Asymmetric Information, Choice of Workout Under Financial Distress, and Absolute Priority Violations","authors":"S. Banerji, P. Bose","doi":"10.2139/ssrn.499602","DOIUrl":"https://doi.org/10.2139/ssrn.499602","url":null,"abstract":"We study the reorganization of a financially distressed firm when public debt-holders are uninformed about future profitability of its projects. With large expected NPV of the continuation project, exchange offers restructure the public debt. Low NPV results in liquidation. For intermediate ranges of NPV, the bank refinances the short-term public debt. We show that the signaling requirements of exchange offers imply additional equity to the firm's shareholders in violation of the Absolute Priority Rule. Our analysis derives testable hypothesis relating the nature of workouts and the magnitude of APR violations to observables such as the short term public debt.","PeriodicalId":443277,"journal":{"name":"Durham Business School Research Paper Series","volume":"61 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2004-06-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114079569","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we investigate for the presence of non-stochastic, possibly nonlinear deterministic dynamical cycles in financial time series. Evidence of nonlinear dynamics is revealed in denoised daily stock market index returns for six countries by combining Recurrence Quantification Analysis (RQA: see Zbilut and Webber (J. Appl. Phys. 76(2) (1994) 965)) and wavelet filtering. Quantitative and qualitative results indicate that through wavelet pre-filtering we can obtain a clearer view of the underlying dynamical structure of returns generating processes. Our results also suggest the existence of high dimensional deterministic dynamics, unstable periodic orbits and chaos.
{"title":"Recurrence Quantification Analysis of Wavelet Pre-Filtered Index Returns","authors":"Antonios Antoniou, Costas E. Vorlow","doi":"10.2139/ssrn.415361","DOIUrl":"https://doi.org/10.2139/ssrn.415361","url":null,"abstract":"In this paper we investigate for the presence of non-stochastic, possibly nonlinear deterministic dynamical cycles in financial time series. Evidence of nonlinear dynamics is revealed in denoised daily stock market index returns for six countries by combining Recurrence Quantification Analysis (RQA: see Zbilut and Webber (J. Appl. Phys. 76(2) (1994) 965)) and wavelet filtering. Quantitative and qualitative results indicate that through wavelet pre-filtering we can obtain a clearer view of the underlying dynamical structure of returns generating processes. Our results also suggest the existence of high dimensional deterministic dynamics, unstable periodic orbits and chaos.","PeriodicalId":443277,"journal":{"name":"Durham Business School Research Paper Series","volume":"65 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-06-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131308554","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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