Pricing anomalies in the Finnish stock market

The aim of this thesis is to examine whether the pricing anomalies exists in the Finnish stock markets by comparing the performance of quantile portfolios that are formed on the basis of either individual valuation ratios, composite value measures or combined value and momentum indicators. All the research papers included in the thesis show evidence of value anomalies in the Finnish stock markets. In the first paper, the sample of stocks over the 1991-2006 period is divided into quintile portfolios based on four individual valuation ratios (i.e., E/P, EBITDA/EV, B/P, and S/P) and three hybrids of them (i.e. composite value measures). The results show the superiority of composite value measures as selection criterion for value stocks, particularly when EBITDA/EV is employed as earnings multiple. The main focus of the second paper is on the impact of the holding period length on performance of value strategies. As an extension to the first paper, two more individual ratios (i.e. CF/P and D/P) are included in the comparative analysis. The sample of stocks over 1993- 2008 period is divided into tercile portfolios based on six individual valuation ratios and three hybrids of them. The use of either dividend yield criterion or one of three composite value measures being examined results in best value portfolio performance according to all performance metrics used. Parallel to the findings of many international studies, our results from performance comparisons indicate that for the sample data employed, the yearly reformation of portfolios is not necessarily optimal in order to maximally gain from the value premium. Instead, the value investor may extend his holding period up to 5 years without any decrease in long-term portfolio performance. The same holds also for the results of the third paper that examines the applicability of data envelopment analysis (DEA) method in discriminating the undervalued stocks from overvalued ones. The fourth paper examines the added value of combining price momentum with various value strategies. Taking account of the price momentum improves the performance of value portfolios in most cases. The performance improvement is greatest for value portfolios that are formed on the basis of the 3-composite value measure which consists of D/P, B/P and EBITDA/EV ratios. The risk-adjusted performance can be enhanced further by following 130/30 long-short strategy in which the long position of value winner stocks is leveraged by 30 percentages while simultaneously selling short glamour loser stocks by the same amount. Average return of the long-short position proved to be more than double stock market average coupled with the volatility decrease. The fifth paper offers a new approach to combine value and momentum indicators into a single portfolio-formation criterion using different variants of DEA models. The results throughout the 1994-2010 sample period shows that the top-tercile portfolios outperform both the market portfolio and the corresponding bottom-tercile portfolios. In addition, the middle-tercile portfolios also outperform the comparable bottom-tercile portfolios when DEA models are used as a basis for stock classification criteria. To my knowledge, such strong performance differences have not been reported in earlier peer-reviewed studies that have employed the comparable quantile approach of dividing stocks into portfolios. Consistently with the previous literature, the division of the full sample period into bullish and bearish periods reveals that the top-quantile DEA portfolios lose far less of their value during the bearish conditions than do the corresponding bottom portfolios. The sixth paper extends the sample period employed in the fourth paper by one year (i.e. 1993- 2009) covering also the first years of the recent financial crisis. It contributes to the fourth paper by examining the impact of the stock market conditions on the main results. Consistently with the fifth paper, value portfolios lose much less of their value during bearish conditions than do stocks on average. The inclusion of a momentum criterion somewhat adds value to an investor during bullish conditions, but this added value turns to negative during bearish conditions. During bear market periods some of the value loser portfolios perform even better than their value winner counterparts. Furthermore, the results show that the recent financial crisis has reduced the added value of using combinations of momentum and value indicators as portfolio formation criteria. However, since the stock markets have historically been bullish more often than bearish, the combination of the value and momentum criteria has paid off to the investor despite the fact that its added value during bearish periods is negative, on an average.

Performance of active portfolio management and the effect of stock market trend

Purpose of the study is to evaluate performance of active portfolio management and the effect of stock market trend on the performance. Theory of efficient markets states that market prices reflect all available information and that all investors share a common view of future price developments. This view gives little room for the success of active management, but the theory has been disputed – at least the level of efficiency. Behavioral finance has developed theories that identify irrational behavior patterns of investors. For example, investment decisions are not made independent of past market developments. These findings give reason to believe that also the performance of active portfolio management may depend on market developments. Performance of 16 Finnish equity funds is evaluated during the period of 2005 to 2011. In addition two sub periods are constructed, a bull market period and a bear market period. The sub periods are created by joining together the two bull market phases and the two bear market phases of the whole period. This allows for the comparison of the two different market states. Performance of the funds is measured with risk-adjusted performance by Modigliani and Modigliani (1997), abnormal return over the CAPM by Jensen (1968), and market timing by Henriksson and Merton (1981). The results suggested that in average the funds are not able to outperform the market portfolio. However, the underperformance was found to be lower than the management fees in average which suggests that portfolio managers are able to do successful investment decisions to some extent. The study revealed substantial dependence on the market trend for all of the measures. The risk-adjusted performance measure suggested that in bear markets active portfolio managers in average are able to beat the market portfolio but not in bull markets. Jensen´s alpha and the market timing model also showed striking differences between the two market states. The results of these two measures were, however, somewhat problematic and reliable conclusions about the performance could not be drawn.

Hedge-rahastojen menestyksen pysyvyys ja suhteellinen suoriutuminen sijoittajan näkökulmasta

The purpose of the thesis is to examine the long-term performance persistence and relative performance of hedge funds during bear and bull market periods. Performance metrics applied for fund rankings are raw return, Sharpe ratio, mean variance ratio and strategy distinctiveness index calculated of the original and clustered data correspondingly. Four different length combinations for selection and holding periods are employed. The persistence is examined using decile and quartile portfolio formatting approach and on the basis of Sharpe ratio and SKASR as performance metrics. The relative performance persistence is examined by comparing hedge portfolio returns during varying stock market conditions. The data is gathered from a private database covering 10,789 hedge funds and time horizon is set from January 1990 to December 2012. The results of this thesis suggest that long-term performance persistence of the hedge funds exists. The degree of persistence also depends on the performance metrics employed and length combination of selection and holding periods. The best results of performance persistence were obtained in the decile portfolio analysis on the basis of Sharpe ratio rankings for combination of 12-month selection period and the holding period of equal length. The results also suggest that the best performance persistence occurs in the Event Driven and Multi strategies. Dummy regression analysis shows that a relationship between hedge funds and stock market returns exists. Based on the results, Dedicated Short Bias, Global Macro, Managed Futures and Other strategies perform well during bear market periods. The results also indicate that the Market Neutral strategy is not absolutely market neutral and the Event Driven strategy has the best performance among all hedge strategies.

Tunnuslukuperusteisten sijoitusstrategioiden menestys Suomen osakemarkkinoilla finanssikriisin aikana

Tämän tutkielman tavoitteena on selvittää ja analysoida tunnuslukuihin perustuvien sijoitusstrategioiden tuottoja voimakkailla lasku- ja nousumarkkinoilla finanssikriisin aikana. Säilyttääkö arvostrategian alhaisten tunnuslukujen portfolio arvonsa laskukausilla parhaiten tai tuottaako kasvustrategia vahvalla nousukaudella parhaan tuoton? Miten yhtiöiden taloudellinen asema vaikuttaa tuottoihin jyrkillä laskukausilla ja nousukaudella? Tutkimusaineistona ovat julkisesti noteeratut Helsingin pörssin yhtiöt aikavälillä 13.7.2007 - 4.10.2011. Ajanjaksoon mahtuu kaksi laskukautta ja nousukausi. Yhtiöt on jaettu tunnuslukujen arvostuksen mukaan viiteen portfolioon. Tutkittavat tunnusluvut ovat P/E-luku, P/B-luku, EV/Ebit-luku, oman pääoman tuotto, omavaraisuusaste, current ratio ja Grahamin luku. Tulosten perusteella arvostrategia menestyi hyvin nousukaudella niin P/E-luvun kuin P/B-luvun kategorian tuotoissa, mutta ei erottunut edukseen laskukausilla. Huomattavaa oli myös korkean omavaraisuuden yhtiöiden voimakas defensiivisyys molemmilla laskukausilla. Toisaalta ne olivat myös nousukaudella vähätuottoisia.

Wooden packaging waste reuse and refining

The aim of the thesis was both to study wooden packaging waste reuse and refining generated in the forestry machine factory environment, and to find alternative wooden packaging waste utilization options in order to create a new operating model which would decrease the overall amount of waste produced. As environmental and waste legislation has become more rigid and companies' own environmental management systems’ requirements and control have increased, companies have had to consider their environmental aspects more carefully. Companies have to take into account alternative ways of reducing waste through an increase in reuse and recycling. A part of this waste is from different forms of packaging. In the metal industry the most heavily used packaging material is wooden packaging, as such material is heavy and the packaging has to be able to bear heavy stress. In the theoretical part of the thesis, the requirements of packaging and packaging waste legislation, as well as environmental management systems governing companies’ processing of their packaging waste, are studied. The theoretical part includes a process study of systems, which direct packaging waste and wooden packaging waste refining. In addition, methods related to the continuous improvement of these processes are introduced. This thesis concentrates on designing and creating a new operating model in relation to wooden packaging waste processing. The main target was to find an efficient model in order to decrease the total amount of wooden packaging waste and to increase refining. The empirical part introduces methods for approaches to wooden packaging waste re-utilization, as well as a description of a new operating model and its impact.

Modeling Energy Futures Returns With Markov Regime Switching Model

Financial time series have a tendency of abruptly changing their behavior and maintain this behavior for several consecutive periods, and commodity futures returns are not an exception. This quality proposes that nonlinear models, as opposed to linear models, can more accurately describe returns and volatility. Markov regime switching models are able to match this behavior and have become a popular way to model financial time series. This study uses Markov regime switching model to describe the behavior of energy futures returns on a commodity level, because studies show that commodity futures are a heterogeneous asset class. The purpose of this thesis is twofold. First, determine how many regimes characterize individual energy commodities’ returns in different return frequencies. Second, study the characteristics of these regimes. We extent the previous studies on the subject in two ways: We allow for the possibility that the number of regimes may exceed two, as well as conduct the research on individual commodities rather than on commodity indices or subgroups of these indices. We use daily, weekly and monthly time series of Brent crude oil, WTI crude oil, natural gas, heating oil and gasoil futures returns over 1994–2014, where available, to carry out the study. We apply the likelihood ratio test to determine the sufficient number of regimes for each commodity and data frequency. Then the time series are modeled with Markov regime switching model to obtain the return distribution characteristics of each regime, as well as the transition probabilities of moving between regimes. The results for the number of regimes suggest that daily energy futures return series consist of three to six regimes, whereas weekly and monthly returns for all energy commodities display only two regimes. When the number of regimes exceeds two, there is a tendency for the time series of energy commodities to form groups of regimes. These groups are usually quite persistent as a whole because probability of a regime switch inside the group is high. However, individual regimes in these groups are not persistent and the process oscillates between these regimes frequently. Regimes that are not part of any group are generally persistent, but show low ergodic probability, i.e. rarely prevail in the market. This study also suggests that energy futures return series characterized with two regimes do not necessarily display persistent bull and bear regimes. In fact, for the majority of time series, bearish regime is considerably less persistent. Rahoituksen aikasarjoilla on taipumus arvaamattomasti muuttaa käyttäytymistään ja jatkaa tätä uutta käyttäytymistä useiden periodien ajan, eivätkä hyödykefutuurien tuotot tee tähän poikkeusta. Tämän ominaisuuden johdosta lineaaristen mallien sijasta epälineaariset mallit pystyvät tarkemmin kuvailemaan esimerkiksi tuottojen jakauman parametreja. Markov regiiminvaihtomallit pystyvät vangitsemaan tämän ominaisuuden ja siksi niistä on tullut suosittuja rahoituksen aikasarjojen mallintamisessa. Tämä tutkimus käyttää Markov regiiminvaihtomallia kuvaamaan yksittäisten energiafutuurien tuottojen käyttäytymistä, sillä tutkimukset osoittavat hyödykefutuurien olevan hyvin heterogeeninen omaisuusluokka. Tutkimuksen tarkoitus on selvittää, kuinka monta regiimiä tarvitaan kuvaamaan energiafutuurien tuottoja eri tuottofrekvensseillä ja mitkä ovat näiden regiimien ominaisuudet. Aiempaa tutkimusta aiheesta laajennetaan määrittämällä regiimien lukumäärä tilastotieteellisen testauksen menetelmin sekä tutkimalla energiafutuureja yksittäin; ei indeksi- tai alaindeksitasolla. Tutkimuksessa käytetään päivä-, viikko- ja kuukausiaikasarjoja Brent-raakaöljyn, WTI-raakaöljyn, maakaasun, lämmitysöljyn ja polttoöljyn tuotoista aikaväliltä 1994–2014, siltä osin kuin aineistoa on saatavilla. Likelihood ratio -testin avulla estimoidaan kaikille aikasarjoille regiimien määrä,jonka jälkeen Markov regiiminvaihtomallia hyödyntäen määritetään yksittäisten regiimientuottojakaumien ominaisuudet sekä regiimien välinen transitiomatriisi. Tulokset regiimien lukumäärän osalta osoittavat, että energiafutuurien päiväkohtaisten tuottojen aikasarjoissa regiimien lukumäärä vaihtelee kolmen ja kuuden välillä. Viikko- ja kuukausituottojen kohdalla kaikkien energiafutuurien prosesseissa regiimien lukumäärä on kaksi. Kun regiimejä on enemmän kuin kaksi, on prosessilla taipumus muodostaa regiimeistä koostuvia ryhmiä. Prosessi pysyy ryhmän sisällä yleensä pitkään, koska todennäköisyys siirtyä ryhmään kuuluvien regiimien välillä on suuri. Yksittäiset regiimit ryhmän sisällä eivät kuitenkaan ole kovin pysyviä. Näin ollen prosessi vaihtelee ryhmän sisäisten regiimien välillä tiuhaan. Regiimit, jotka eivät kuulu ryhmään, ovat yleensä pysyviä, mutta prosessi ajautuu niihin vain harvoin, sillä todennäköisyys siirtyä muista regiimeistä niihin on pieni. Tutkimuksen tulokset osoittavat myös, että prosesseissa, joita ohjaa kaksi regiimiä, nämä regiimit eivät välttämättä ole pysyvät bull- ja bear-markkinatilanteet. Tulokset osoittavat sen sijaan, että bear-markkinatilanne on energiafutuureissa selvästi vähemmän pysyvä.

Derivative hedging strategies for bitumen price risk

The objective of the study is to extend the existing hedging literature of the commodity price risks by investigating what kind of hedging strategies can be used in companies using bitumen as raw material in their production. Five different alternative swap hedging strategies in bitumen markets are empirically tested. Strategies tested are full hedge strategy, simple, conservative, and aggressive term structure strategies, and implied volatility strategy. The effectiveness of the alternative strategies is measured by excess returns compared to no hedge strategy. In addition, the downside risk of each strategy is measured with target absolute semi-deviation. Results indicate that any of the tested strategies does not outperform the no hedge strategy in terms of excess returns in all maturities. The best-performing aggressive term structure strategy succeeds to create positive excess returns only in short maturities. However, risk seems to increase hand-in-hand with the excess returns so that the best-performing strategies get the highest risk metrics as well. This implicates that the company willing to gain from favorable price movements must be ready to bear a greater risk. Thus, no superior hedging strategy over the others is found.