Size and book to market effects and the Fama French three factor asset pricing model: Evidence from the Australian stockmarket

The present study adds to the sparse published Australian literature on the size effect, the book to market (BM) effect and the ability of the Fama French three factor model to account for these effects and to improve on the asset pricing ability of the Capital Asset Pricing Model (CAPM). The present study extends the 1981–1991 period examined by Halliwell, Heaney and Sawicki (1999) a further 10 years to 2000 and addresses several limitations and findings of that research. In contrast to Halliwell, Heaney and Sawicki the current study finds the three factor model provides significantly improved explanatory power over the CAPM, and evidence that the BM factor plays a role in asset pricing.

Forecasting stock returns using model-selection criteria

This paper examines the economic significance of return predictability in Australian equities. In light of considerable model uncertainty, formal model-selection criteria are used to choose a specification for the predictive model. A portfolio-switching strategy is implemented according to model predictions. Relative to a buy-and-hold market investment, the returns to the portfolio-switching strategy are impressive under several model-selection criteria, even after accounting for transaction costs. However, as these findings are not robust across other model-selection criteria examined, it is difficult to conclude that the degree of return predictability is economically significant.

Invariant risk attitudes

Concepts of constant absolute risk aversion and constant relative risk aversion have proved useful in the analysis of choice under uncertainty, but are quite restrictive, particularly when they are imposed jointly. A generalization of constant risk aversion, referred to as invariant risk aversion is developed. Invariant risk aversion is closely related to the possibility of representing preferences over state-contingent income vectors in terms of two parameters, the mean and a linearly homogeneous, translation-invariant index of riskiness. The best-known index with such properties is the standard deviation. The properties of the capital asset pricing model, usually expressed in terms of the mean and standard deviation, may be extended to the case of general invariant preferences. (C) 2003 Elsevier Inc. All rights reserved.

Consumption habit and international stock returns

We use the consumption-based asset pricing model with habit formation to study the predictability and cross-section of returns from the international equity markets. We find that the predictability of returns from many developed countries' equity markets is explained in part by changing prices of risks associated with consumption relative to habit at the world as well as local levels. We also provide an exploratory investigation of the cross-sectional implications of the model under the complete world market integration hypothesis and find that the model performs mildly better than the traditional consumption-based model. the unconditional and conditional world CAPMs and a three-factor international asset pricing model. (C) 2004 Elsevier B.V. All rights reserved.

Conditional performance evaluation and the relevance of money flows for Australian international equity funds

This paper assesses the importance of fund flows in the performance evaluation of Australian international equity funds. Two concepts of fund flows are considered in the context of a conditional asset pricing model. The first measure is net fund flow relative to fund size and the second is net fund flow relative to sector flows. We find that incorporating a fund flow measure relative to the sector flow results in a reduction of measured perverse market timing. The results indicate that, at the individual fund level, cash flows are relevant in assessing management outcomes.

Relationship between franking credits and the market risk premium

In a dividend imputation tax system, equity investors have three potential sources of return: dividends, capital gains and franking (tax) credits. However, the standard procedures for estimating the market risk premium (MRP) for use in the capital asset pricing model, ignore the value of franking credits. Officer (1994) notes that if franking credits do affect the corporate cost of capital, their value must be added to the standard estimates of MRP. In the present paper, we explicitly derive the relationship between the value of franking credits (gamma) and the MRP. We show that the standard parameter estimates that have been adopted in practice (especially by Australian regulators) violate this deterministic mathematical relationship. We also show how information on dividend yields and effective tax rates bounds the values that can be reasonably used for gamma and the MRP. We make recommendations for how estimates of the MRP should be adjusted to reflect the value of franking credits in an internally consistent manner.

Modelling pre-clearing vegetation distribution using GIS-integrated statistical, ecological and data models: A case study from the wet tropics of Northeastern Australia

Traditional vegetation mapping methods use high cost, labour-intensive aerial photography interpretation. This approach can be subjective and is limited by factors such as the extent of remnant vegetation, and the differing scale and quality of aerial photography over time. An alternative approach is proposed which integrates a data model, a statistical model and an ecological model using sophisticated Geographic Information Systems (GIS) techniques and rule-based systems to support fine-scale vegetation community modelling. This approach is based on a more realistic representation of vegetation patterns with transitional gradients from one vegetation community to another. Arbitrary, though often unrealistic, sharp boundaries can be imposed on the model by the application of statistical methods. This GIS-integrated multivariate approach is applied to the problem of vegetation mapping in the complex vegetation communities of the Innisfail Lowlands in the Wet Tropics bioregion of Northeastern Australia. The paper presents the full cycle of this vegetation modelling approach including sampling sites, variable selection, model selection, model implementation, internal model assessment, model prediction assessments, models integration of discrete vegetation community models to generate a composite pre-clearing vegetation map, independent data set model validation and model prediction's scale assessments. An accurate pre-clearing vegetation map of the Innisfail Lowlands was generated (0.83r(2)) through GIS integration of 28 separate statistical models. This modelling approach has good potential for wider application, including provision of. vital information for conservation planning and management; a scientific basis for rehabilitation of disturbed and cleared areas; a viable method for the production of adequate vegetation maps for conservation and forestry planning of poorly-studied areas. (c) 2006 Elsevier B.V. All rights reserved.

The risk premium for equity: implications for resource allocation, welfare and policy

Analysis of the equity premium puzzle has focused on private sector capital markets. The object of this paper is to consider the welfare and policy implications of each of the broad classes of explanations of the equity premium puzzle. As would be expected, the greater the deviation from the first-best outcome implied by a given explanation of the equity premium puzzle, the more interventionist are the implied policy conclusions. Nevertheless, even explanations of the equity premium puzzle consistent with a general consumption-based asset pricing model have important welfare and policy implications.

Three-dimensional model for multi-component reactive transport with variable density groundwater flow

PHWAT is a new model that couples a geochemical reaction model (PHREEQC-2) with a density-dependent groundwater flow and solute transport model (SEAWAT) using the split-operator approach. PHWAT was developed to simulate multi-component reactive transport in variable density groundwater flow. Fluid density in PHWAT depends not on only the concentration of a single species as in SEAWAT, but also the concentrations of other dissolved chemicals that can be subject to reactive processes. Simulation results of PHWAT and PHREEQC-2 were compared in their predictions of effluent concentration from a column experiment. Both models produced identical results, showing that PHWAT has correctly coupled the sub-packages. PHWAT was then applied to the simulation of a tank experiment in which seawater intrusion was accompanied by cation exchange. The density dependence of the intrusion and the snow-plough effect in the breakthrough curves were reflected in the model simulations, which were in good agreement with the measured breakthrough data. Comparison simulations that, in turn, excluded density effects and reactions allowed us to quantify the marked effect of ignoring these processes. Next, we explored numerical issues involved in the practical application of PHWAT using the example of a dense plume flowing into a tank containing fresh water. It was shown that PHWAT could model physically unstable flow and that numerical instabilities were suppressed. Physical instability developed in the model in accordance with the increase of the modified Rayleigh number for density-dependent flow, in agreement with previous research. (c) 2004 Elsevier Ltd. All rights reserved.

The traditional rationale of the arm's length approach to transfer pricing - should the separate accounting model be maintained for modern multinational entities?

This article examines the current transfer pricing regime to consider whether it is a sound model to be applied to modern multinational entities. The arm's length price methodology is examined to enable a discussion of the arguments in favour of such a regime. The article then refutes these arguments concluding that, contrary to the very reason multinational entities exist, applying arm's length rules involves a legal fiction of imagining transactions between unrelated parties. Multinational entities exist to operate in a way that independent entities would not, which the arm's length rules fail to take into account. As such, there is clearly an air of artificiality in applying the arm's length standard. To demonstrate this artificiality with respect to modern multinational entities, multinational banks are used as an example. The article concluded that the separate entity paradigm adopted by the traditional transfer pricing regime is incongruous with the economic theory of modern multinational enterprises.

Structural analysis and molecular model of a self-incompatibility RNase from wild tomato

Self-incompatibility RNases (S-RNases) are an allelic series of style glycoproteins associated with rejection of self-pollen in solanaceous plants. The nucleotide sequences of S-RNase alleles from several genera have been determined, but the structure of the gene products has only been described for those from Nicotiana alata. We report on the N-glycan structures and the disulfide bonding of the S-3-RNase from wild tomato (Lycopersicon peruvianum) and use this and other information to construct a model of this molecule. The S-3-RNase has a single N-glycosylation site (Asn-28) to which one of three N-glycans is attached. S-3-RNase has seven Cys residues; six are involved in disulfide linkages (Cys-16-Cys-21, Cys-46-Cys-91, and Cys-166-Cys-177), and one has a free thiol group (Cys-150). The disulfide-bonding pattern is consistent with that observed in RNase Rh, a related RNase for which radiographic-crystallographic information is available. A molecular model of the S-3-RNase shows that four of the most variable regions of the S-RNases are clustered on one surface of the molecule. This is discussed in the context of recent experiments that set out to determine the regions of the S-RNase important for recognition during the self-incompatibility response.

Likelihood-based estimation of the regression model with scrambled responses

A significant problem in the collection of responses to potentially sensitive questions, such as relating to illegal, immoral or embarrassing activities, is non-sampling error due to refusal to respond or false responses. Eichhorn & Hayre (1983) suggested the use of scrambled responses to reduce this form of bias. This paper considers a linear regression model in which the dependent variable is unobserved but for which the sum or product with a scrambling random variable of known distribution, is known. The performance of two likelihood-based estimators is investigated, namely of a Bayesian estimator achieved through a Markov chain Monte Carlo (MCMC) sampling scheme, and a classical maximum-likelihood estimator. These two estimators and an estimator suggested by Singh, Joarder & King (1996) are compared. Monte Carlo results show that the Bayesian estimator outperforms the classical estimators in almost all cases, and the relative performance of the Bayesian estimator improves as the responses become more scrambled.

Satellite observation and climate system model simulation of the St. Lawrence Island polynya

The St. Lawrence Island polynya (SLIP) is a commonly occurring winter phenomenon in the Bering Sea, in which dense saline water produced during new ice formation is thought to flow northward through the Bering Strait to help maintain the Arctic Ocean halocline. Winter darkness and inclement weather conditions have made continuous in situ and remote observation of this polynya difficult. However, imagery acquired from the European Space Agency ERS-1 Synthetic Aperture Radar (SAR) has allowed observation of the St. Lawrence Island polynya using both the imagery and derived ice displacement products. With the development of ARCSyM, a high resolution regional model of the Arctic atmosphere/sea ice system, simulation of the SLIP in a climate model is now possible. Intercomparisons between remotely sensed products and simulations can lead to additional insight into the SLIP formation process. Low resolution SAR, SSM/I and AVHRR infrared imagery for the St. Lawrence Island region are compared with the results of a model simulation for the period of 24-27 February 1992. The imagery illustrates a polynya event (polynya opening). With the northerly winds strong and consistent over several days, the coupled model captures the SLIP event with moderate accuracy. However, the introduction of a stability dependent atmosphere-ice drag coefficient, which allows feedbacks between atmospheric stability, open water, and air-ice drag, produces a more accurate simulation of the SLIP in comparison to satellite imagery. Model experiments show that the polynya event is forced primarily by changes in atmospheric circulation followed by persistent favorable conditions: ocean surface currents are found to have a small but positive impact on the simulation which is enhanced when wind forcing is weak or variable.

A Comparison of Bayesian and Sampling Theory Inferences in a Probit Model

HE PROBIT MODEL IS A POPULAR DEVICE for explaining binary choice decisions in econometrics. It has been used to describe choices such as labor force participation, travel mode, home ownership, and type of education. These and many more examples can be found in papers by Amemiya (1981) and Maddala (1983). Given the contribution of economics towards explaining such choices, and given the nature of data that are collected, prior information on the relationship between a choice probability and several explanatory variables frequently exists. Bayesian inference is a convenient vehicle for including such prior information. Given the increasing popularity of Bayesian inference it is useful to ask whether inferences from a probit model are sensitive to a choice between Bayesian and sampling theory techniques. Of interest is the sensitivity of inference on coefficients, probabilities, and elasticities. We consider these issues in a model designed to explain choice between fixed and variable interest rate mortgages. Two Bayesian priors are employed: a uniform prior on the coefficients, designed to be noninformative for the coefficients, and an inequality restricted prior on the signs of the coefficients. We often know, a priori, whether increasing the value of a particular explanatory variable will have a positive or negative effect on a choice probability. This knowledge can be captured by using a prior probability density function (pdf) that is truncated to be positive or negative. Thus, three sets of results are compared:those from maximum likelihood (ML) estimation, those from Bayesian estimation with an unrestricted uniform prior on the coefficients, and those from Bayesian estimation with a uniform prior truncated to accommodate inequality restrictions on the coefficients.