FEMARC Current Research Projects

International Portfolio Diversification

This work undertaken with Dr Garry MacDonald of the School of Economics and Finance, Curtin University of Technology, involves applications of the theory of cointegrated vector autoregressive models to analyse the potential long-term benefits of international portfolio diversification across 17 international stock markets. We are extending this research by modelling the common trend in international stock prices.

An Analysis of the Speed of Australian Interest Rate Adjustment to Reserve Bank Base Rate Changes.

This project undertaken with Nigel Morkel-Kingsbury analyses the speed with which the Australian banks pass on base rate changes to commercial and retail rates using a time-series framework of analysis.

A Hidden Markov Chain Model of the Term Structure of Bond Credit Risk Spreads and Applications of Linear Programming to Bond Pricing.

This project undertaken with Professor Lyn Thomas of the University of Southampton involves using US Standard and Poor's credit rating data to build a Markov model which allows for dependency between the stochastic process modelling the interest rate and the Markov chain process describing credit rating changes in the bonds. A second stage of this project involves applying linear programming to strip the coupons from bonds to prevent mispricing in the spread structure and to estimate the default probabilities of risky bonds without relying on interest rate models. Another section of the project features applications of linear programming to calculate portfolio durations for non-parallel shifts of the yield curve.

The comparative analysis of company financial policy decisions

Research involving a comparative evaluation of the determinants of the financial policies of Australian, British and Japanese companies. This involves comparative analysis of financing, capital structure and dividend policies.

Rationality in equity markets

Research project with Gary Macdonald of the School of Economics and Finance Curtin University, involving an investigation of equilibrium and efficiency in Australian and South East Asian Financial markets. The first stage of the project involved the application of cointegration and unit roots tests to time series return data for stock exchange accumulation indices for 19 countries. The first stage involved an analysis of the potential for portfolio diversification across these countries respective markets. The second stage involves a test of the dividend-share price relationship and the present value model in a number of these markets.

This second project with Gary MacDonald involves tests of market efficiency, market rationality, and analysis of whether price overreaction phenomena occur in equity markets in the Asia-Pacific region. The pricing efficiency of equity markets in the Asia Pacific Region has also been analysed using applications of the theory of cointegrated vector autoregressive models. This permits an approach to modeling rational expectations of the present value relationship between prices and dividends. A VAR approach is applied to tests of the present value relationship in the various markets.

The determinants of returns in the Malaysian Stock Market

This work involves tests of the efficacy of the Capital Asset Pricing Model in the Malaysian Market and examines whether there is a linear relationship between return and beta. Tests for the existence of various anomalies in price behaviour such as the ’small firm’ effect, the impact of book equity to market equity values, own variance etc., will be undertaken.

Time-Series Tests of the Hedging Effectiveness of the Sydney Futures Exchange

This project features a set of time-series tests of the hedging effectiveness of the Sydney Futures Markets analysing the All Ordinaries Share Price Index, 90 Day Bank Bills, 10 Year Treasury Bonds, 3 Year Treasury Bonds and Wool Contracts plus corresponding cash series. The tests will use daily data for the maximum time periods. Research into the hedging effectiveness of the Sydney Futures Exchange applying time-series modelling techniques supported by a Small ARC Grant of $15,000 in 1997. The first stage of the project was undertaken with Noel Souness as research assistant and resulted in two working papers.

The second stage involves a panel data approach to the time series tests and Kathleen Walsh from the School of Economics and Finance at Curtin University is acting as a part-time research assistant on this project.

A Study of the Linkages Between Accounting Earnings, Dividends and Stock Prices

A time-series analysis of linkages between accounting earnings, dividends and stock prices undertaken with Dr. G. MacDonald of Curtin University, Professor A.M. Masih of Edith Cowan University and Mr. R. Masih of Goldman Sachs, supported by a Small ARC grant of $17,500 in 1999.

Managed Fund Performance

A project on the measurement of managed fund performance is being developed with Professor T. Brailsford of ANU, Professor R. Faff of RMIT and Assirt, the fund rating agency using data provided by Assirt. The work is supported by a SPIRT grant in 1999, 2000 and funding for an APA until 2001. This work provides the cornerstone of FEMARC's association with SIRCA's Fund Management Centre.

The Retirement Savings Decisions of Australian Workers: A Long-term Study of Public Sector and Industry Study Members

The project undertaken by Paul Gerrans and Marilyn Clark-Murphy is examing the fund and investment choices made by employees for their employer-sponsored superannuation. The research team is working with UniSuper, Superannuation Trust of Australia, Government Employees Superannuation Board of Western Australia and others to investigate the choices made and the factors which influence their decisions. Australia is at the forefront of OECD nations in the use of compulsory superannuation to reduce the burden of age pension provision on government but concern has been consistently expressed by the financial services industry that employees may not be in a position to analyse the information available to them and make choices that will maximise their retirement income. This study will offer significant insights into the decision processes of individual members.

Purchasing Power Parity in the Asia-Pacific

This project involves the application of time series econometric testing to exchange rate theory of the Asian region. This will include applying standard unit root and cointegration testing as well as panel data procedures to data retrieved from the Datastream International Database and the International Monetary Fund's International Financial Statistics database. Special areas of interest include testing the ability to forecast exchange rates, the differences in adjustment speeds of cross-national and cross-continental PPP, the dynamics of PPP relationships over time and the influence of other variables (e.g. interest rates, prices and fiscal balances) on such relationships. This project will be undertaken by D. E. Allen, S. Cruickshank and G. A. MacDonald.

Mergers and Investment flows in the Investment Industry

This project undertaken with PhD student Jerry Parwada who is now sponsored by ASSIRT and based in their offices and with SIRCA in Sydney involves an assessment of how investment flows respond to merger activity within the managed fund industry.

The market impact of trading activity

This project is being undertaken by Wenling Yang who is now a scholarship funded PhD student at SIRCA sponsored by Salomon Smith Barney and Dr Garry Macdonald of Curtin University. It involves the application of Engle and Russell's recently developed Auto-Conditional Duration Model (ACD) to study the impact of trading activity using real-time high frequency transactions data provided by SIRCA.

Mean reversion of Profitability

This project being undertaken with ECU Phd student Heazry Salim looks at the rate of mean-reversion of profitability using a sample of just under 1000 UK companies from 1982-2000. The first section of the project mirrors a previous US study by Fama and French (2000) utilising a cross-sectional regression approach. The next section will apply time series modelling techniques.

Tests of the Conditional CAPM in emerging markets

This project undertaken with Joseline Chihimini, a Masters student, involves tests of a conditional CAPM in emerging capital markets using a GMM framework.

Accounting, Finance and Economics