Performance characteristic of moving average trading rules in the Finnish stock market

The thesis examines the profitability of DMAC trading rules in the Finnish stock market over the 1996-2012 period. It contributes to the existing technical analysis literature by comparing for the first time the performance of DMAC strategies based on individual stock trading portfolios to the performance of index trading strategies based on the trading on the index (OMX Helsinki 25) that consists of the same stocks. Besides, the market frictions including transaction costs and taxes are taken into account, and the results are reported from both institutional and individual investor’s perspective. Performance characteristic of DMAC rules are evaluated by simulating 19,900 different trading strategies in total for two non- overlapping 8-year sub-periods, and decomposing the full-sample-period performance of DMAC trading strategies into distinct bullish- and bearish-period performances. The results show that the best DMAC rules have predictive power on future price trends, and these rules are able to outperform buy-and-hold strategy. Although the performance of the DMAC strategies is highly dependent on the combination of moving average lengths, the best DMAC rules of the first sub-period have also performed well during the latter sub-period in the case of individual stock trading strategies. According to the results, the outperformance of DMAC trading rules over buy-and-hold strategy is mostly attributed to their superiority during the bearish periods, and particularly, during stock market crashes.

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.

Financial Slack and Bidding Firms’ Takeover Announcement Stock Returns – an Event Study

Despite the fact that the literature on mergers and acquisitions is extensive, relatively little effort has been made to examine the relationship between the acquiring firms’ financial slack and short-term post-takeover announcement abnormal stock returns. In this study, the case is made that the financial slack of a firm is not only an outcome of past business and financing activities but it also may affect the quality of acquisition decisions. We will hypothesize that the level of financial slack in a firm is negatively associated with the abnormal returns following acquisition announcements because slack reduces managerial discipline over the use of corporate funds and also because it may give rise to managerial self-serving behavior. In this study, financial slack is measured in terms of three financial statements ratios: leverage ratio, cash and equivalents to total assets ratio and free cash flow to total assets ratio. The data used in this paper is collected from two main sources. A list comprising 90 European acquisition announcements is retrieved from Thomson One Banker database. The stock price data and financial statements information for the respective firms is collected using Datastream. Our empirical analysis is two-fold. First, we conduct a two-sample t-test where we find that the most slack-rich firms experience lower abnormal returns than the most slack-poor firms in the event window [-1, +1], significant at 5% risk level. Second, we perform a cross sectional regression for sample firms using three financial statements ratios to explain cumulative abnormal returns (CAR). We find that leverage shows a statistically significant positive relationship with cumulative abnormal returns in event window [-1; +1] (significance 5%). Moreover, cash to total assets ratio showed a weak negative relationship with CAR (significant at 10%) in event window [-1; +1]. We conclude that our hypothesis for the inverse relationship between slack and abnormal returns receives empirical support. Based on the results of the event study we get empirical support for the hypothesis that the capital markets expect the acquisitions undertaken by slack-rich firms to more likely be driven by managerial self-serving behavior and hubris than do those undertaken by slackpoor firms, signaling possible agency problems and behavioral biases.

The Use of Systematic Value Strategies in Separating the Winners from the Losers: Evidence from the Finnish Markets

This study examines the Magic Formula and ERP5 value strategies in the Finnish stocks markets. Magic Formula ranks stocks based on EV/EBIT and ROA and ERP5 based on EV/EBIT, ROA, P/B and five-year trailing ROA. The purpose of the study is to examine whether the value strategies can be used to generate excess returns over the market index. The data has been collected from the Datastream database for the sample period from May 1997 to May 2010 and consists of the companies listed on the main list of Helsinki Stock Exchange. This study confirms the findings of previous research that value premium exists in the Finnish stock markets and that systematic value strategies can be used to form portfolios that outperform the market index with lower volatility.

Finnish stock market reaction to quarterly earnings announcements

This thesis examines the stock market reactions to quarterly earnings announcements. The study covers the OMX Helsinki 25 index companies for the years 2007–2010. The stock market response to quarterly earnings announcements is tested by employing the event study –methodology and daily stock returns of Finnish listed companies. The thesis provides evidence that stock prices react to earnings announcements that exceed or fall below analyst forecasts. The most liquid stocks earn higher returns around positive earnings news than less traded stocks, which supports the evidence from previous studies. This thesis finds evidence for the authorization to sell stocks short reducing the post–earnings announcement drift induced by negative earnings news. In addition, the market’s reaction to earnings announcements seems to quicken during economic turmoil.

Market integration, return and volatility dynamics; empirical evidence from African stock markets

Frontier and Emerging economies have implemented policies with the objective of liberalizing their equity markets. Equity market liberalization opens the domestic equity market to foreign investors and as well paves the way for domestic investors to invest in foreign equity securities. Among other things, equity market liberalization results in diversification benefits. Moreover, equity market liberalization leads to low cost of equity capital resulting from the lower rate of return by investors. Additionally, foreign and local investors share any potential risks. Liberalized equity markets also become liquid considering that there are more investors to trade. Equity market liberalization results in financial integration which explains the movement of two markets. In crisis period, increased volatility and co-movement between two markets may result in what is termed contagion effects. In Africa, major moves toward financial liberalization generally started in the late 1980s with South Africa as the pioneer. Over the years, researchers have studied the impact of financial liberalization on Africa’s economic development with diverse results; some being positive, others negative and still others being mixed. The objective of this study is to establish whether African stock-markets are integrated into the United States (US) and World market. Furthermore, the study helps to see if there are international linkages between the Africa, US and the world markets. A Bivariate- VAR- GARCH- BEKK model is employed in the study. In the study, the effect of thin trading is removed through series of econometric data purification. This is because thin trading, also known as non-trading or inconsistency of trading, is a main feature of African markets and may trigger inconsistency and biased results. The study confirmed the widely established results that the South Africa and Egypt stock markets are highly integrated with the US and World market. Interestingly, the study adds to knowledge in this research area by establishing the fact that Kenya is very integrated with the US and World markets and that it receives and exports past innovations as well as shocks to and from the US and World market.

The Use of Data Envelopment Analysis as Equity Portfolio Selection Criterion in the Finnish Stock Market

This thesis examines the application of data envelopment analysis as an equity portfolio selection criterion in the Finnish stock market during period 2001-2011. A sample of publicly traded firms in the Helsinki Stock Exchange is examined in this thesis. The sample covers the majority of the publicly traded firms in the Helsinki Stock Exchange. Data envelopment analysis is used to determine the efficiency of firms using a set of input and output financial parameters. The set of financial parameters consist of asset utilization, liquidity, capital structure, growth, valuation and profitability measures. The firms are divided into artificial industry categories, because of the industry-specific nature of the input and output parameters. Comparable portfolios are formed inside the industry category according to the efficiency scores given by the DEA and the performance of the portfolios is evaluated with several measures. The empirical evidence of this thesis suggests that with certain limitations, data envelopment analysis can successfully be used as portfolio selection criterion in the Finnish stock market when the portfolios are rebalanced at annual frequency according to the efficiency scores given by the data envelopment analysis. However, when the portfolios were rebalanced every two or three years, the results are mixed and inconclusive.

Stock Price Reactions on M&A, Dividends and Game Releases. Evidence from Gaming Industry.

A rapidly growing gaming industry, which specializes on PC, console, online and other games, attracts attention of investors and analysts, who try to understand what drives changes of the gaming industry companies’ stock prices. This master thesis shows the evidence that, besides long-established types of events (M&A and dividend payments), the companies’ stock price changes depend on industry-specific events. I analyzed specific for gaming industry events - game releases with respect to its subdivisions: new games-sequels, games ratings and subdivision according to a developer of a game (self-developed by publisher or outsourced). The master thesis analyzes stock prices of 55 companies from gaming industry from all over the world. The research period covers 5 year, spreading from April 2008 to April 2013. Executed with an event study method, results of the research show that all the analyzed events types have significant influence on the stock prices of the gaming industry companies. The current master thesis suggests that acquisitions in the industry affect positively bidders’ and targets’ stock prices. Mergers events cause positive stock price reactions as well. But dividends payments and game releases events influence negatively on the stock prices. Game releases’ effect is up to -2.2% of cumulative average abnormal return (CAAR) drop during the first ten days after the game releases. Having researched different kinds of events and identified the direction of their impact, the current paper can be of high value for investors, seeking profits in the gaming industry, and other interested parties.

Interdependence of International Stock Markets, European Government Bond Market and Gold Market

This thesis examines the interdependence of international stock markets (the USA, Europe, Japan, emerging markets, and frontier markets), European government bond market, and gold market during the 21st century. Special focus is on the dynamics of the correlations between the markets, as well as on, spillovers in mean returns and volatility. The mean return spillovers are examined on the basis of the bivariate VAR(1) model, whereas the bivariate BEKK-GARCH(1, 1) model is employed for the analysis of the volatility spillovers. In order to analyze the spillover effects in different market conditions, the full sample period from 2000 to 2013 is divided into the pre-crisis period (2000–2006) and the crisis period (2007–2013). The results indicate an increasing interdependence especially within international stock markets during the periods of financial turbulence, and are thus consistent with the existing literature. Hence, bond and gold markets provide the best diversification benefits for equity investors, particularly during the periods of market turmoil.

Insiders´ views as a predictor of stock performance : can insider trading be used to predict stock performance on the United States stock market?

This thesis studies the possibility of using information on insiders’ transactions to forecast future stock returns after the implementation of Sarbanes Oxley Act in July 2003. Insider transactions between July 2003 and August 2009 are analysed with regression tests to identify the relationships between insiders’ transactions and future stock returns. This analysis is complemented with rudimentary bootstrapping procedures to verify the robustness of the findings. The underlying assumption of the thesis is that insiders constantly receive pieces of information that indicate future performance of the company. They may not be allowed to trade on large and tangible pieces of information but they can trade on accumulation of smaller, intangible pieces of information. Based on the analysis in the thesis insiders’ profits were found not to differ from the returns from broad stock index. However, their individual transactions were found to be linked to future stock returns. The initial model was found to be unstable but some of the predictive power could be sacrificed to achieve greater stability. Even after sacrificing some predictive power the relationship was significant enough to allow external investors to achieve abnormal profits after transaction costs and taxes. The thesis does not go into great detail about timing of transactions. Delay in publishing insiders’ transactions is not taken into account in the calculations and the closed windows are not studied in detail. The potential effects of these phenomena are looked into and they do not cause great changes in the findings. Additionally the remuneration policy of an insider or a company is not taken into account even though it most likely affects the trading patterns of insiders. Even with the limitations the findings offer promising opportunities for investors to improve their investment processes by incorporating additional information from insiders’ transaction into their decisions. The findings also raise questions on how insider trading should be regulated. Insiders achieve greater returns than other investors based on superior information. On the other hand, more efficient information transfer could warrant more lenient regulation. The fact that insiders’ returns are dominated by the large investment stake they maintain all the time in their own companies also speaks for more leniency. As Sarbanes Oxley Act considerably modified the insider trading landscape, this analysis provides information that has not been available before. The thesis also constitutes a thorough analysis of insider trading phenomenon which has previously been somewhat separated into several studies.

Prediction of market switching and delisting events from OMX First North Nordic multilateral stock exchange

This thesis studies the predictability of market switching and delisting events from OMX First North Nordic multilateral stock exchange by using financial statement information and market information from 2007 to 2012. This study was conducted by using a three stage process. In first stage relevant theoretical framework and initial variable pool were constructed. Then, explanatory analysis of the initial variable pool was done in order to further limit and identify relevant variables. The explanatory analysis was conducted by using self-organizing map methodology. In the third stage, the predictive modeling was carried out with random forests and support vector machine methodologies. It was found that the explanatory analysis was able to identify relevant variables. The results indicate that the market switching and delisting events can be predicted in some extent. The empirical results also support the usability of financial statement and market information in the prediction of market switching and delisting events.

The Russian National Innovation System - an International Perspective

Russia inherited a large research and development (R&D) sector from the Soviet times, and has retained a substantial R&D sector today, compared with other emerging economies. However, Russia is falling behind in all indicators measuring innovative output in comparison with most developed countries. Russia’s innovation performance is disappointing, despite the available stock of human capital and overall investment in R&D. The communist legacy still influences the main actors of the innovation system. The federal state is still the most important funding source for R&D. Private companies are not investing in innovative activities, preferring to “import” innovations embedded in foreign technologies. Universities are outsiders in the innovation system, only a few universities carry out research activities. Nowadays, Russia is a resource-depended country. The economy depends on energy and metals for growth. The Russian economy faces the challenge of diversification and should embrace innovation, and shift to a knowledge economy to remain competitive in the long run. Therefore, Russia has to tackle the challenge of developing an efficient innovation system with its huge potential in science expertise and engineering know-how.

Stock Market reaction to the CSR announcements of American fast food companies

The purpose of this study is to examine whether Corporate Social Responsibility (CSR) announcements of the three biggest American fast food companies (McDonald’s, YUM! Brands and Wendy’s) have any effect on their stock returns as well as on the returns of the industry index (Dow Jones Restaurants and Bars). The time period under consideration starts on 1st of May 2001 and ends on 17th of October 2013. The stock market reaction is tested with an event study utilizing CAPM. The research employs the daily stock returns of the companies, the index and the benchmarks (NASDAQ and NYSE). The test of combined announcements did not reveal any significant effect on the index and McDonald’s. However the stock returns of Wendy’s and YUM! Brands reacted negatively. Moreover, the company level analyses showed that to their own CSR releases McDonald’s stock returns respond positively, YUM! Brands reacts negatively and Wendy’s does not have any reaction. Plus, it was found that the competitors of the announcing company tend to react negatively to all the events. Furthermore, the division of the events into sustainability categories showed statistically significant negative reaction from the Index, McDonald’s and YUM! Brands towards social announcements. At the same time only the index was positively affected by to the economic and environmental CSR news releases.

Factors Affecting Consumer Investment Intentions. Empirical Evidence from Finland

The thesis aims to build a theoretical model to explain consumer investment intentions in stocks and investment funds. The model examines the relationships between subjective investment knowledge, expected sacrifice, expected investment value, compatibility, perceived behavioral control and investment intentions. The data was collected via web-based survey and consisted of 45- to 65-year-old Finnish consumers (n=154). Confirmatory factor analysis (CFA), structural equation modeling (SEM) and t-tests were applied in analyzing the data. The results suggest that among average household consumers expected investment value consists of three dimensions, namely, economic, functional, and emotional, whereas expected sacrifice consists of effort, financial risk, source risk, and psychological risk. Two structural models were assessed, one for stock investments and one for investment funds. Whereas the models presented somewhat different outcomes, in both models compatibility had an essential role in explaining consumer investment intentions. Compatibility was affected by expected investment value and expected sacrifice. Subjective investment knowledge impacted consumers’ evaluations of the value and sacrifices. The effect of perceived behavioral control on investment intentions was rather small, however significant. Moreover, the results suggest that there are significant differences between consumers with no investment experience and consumers with investment experience in subjective investment knowledge, the dimensions of expected sacrifices and expected investment value, perceived behavioral control, compatibility and investment intentions.