Serial correlation in the returns of UK capitalization based portfolios

This article examines whether UK portfolio returns are time varying so that expected returns follow an AR(1) process as proposed by Conrad and Kaul for the USA. It explores this hypothesis for four portfolios that have been formed on the basis of market capitalization. The portfolio returns are modelled using a kalman filter signal extraction model in which the unobservable expected return is the state variable and is allowed to evolve as a stationary first order autoregressive process. It finds that this model is a good representation of returns and can account for most of the autocorrelation present in observed portfolio returns. This study concludes that UK portfolio returns are time varying and the nature of the time variation appears to introduce a substantial amount of autocorrelation to portfolio returns. Like Conrad and Kaul if finds a link between the extent to which portfolio returns are time varying and the size of firms within a portfolio but not the monotonic one found for the USA.

Explaining volatility and serial correlation in opening and closing returns:a study of the FT-30 components

In this paper the performance of opening and closing returns, for the components of the FT-30 will be studied. It will be shown that for these stocks opening returns have higher volatility and a greater tendency towards negative serial correlation than closing returns. Unlike previous studies this contrasting performance cannot solely be attributed to differences in the trading mechanism across the trading day. All the stocks used in our sample trade thought the day using a uniform trading mechanism. In this paper, we suggest that it is differences in the speed that closing and opening returns adjust to new information that causes differences in return performance. By estimating the Amihud and Mendelson (1987) [Amihud, Yakov, & Mendelson, Haim (1987). Trading mechanisms and stock returns: An empirical investigation, Journal of Finance, 62 533-553.] partial adjustment model with noise, we show that opening returns have a tendency towards over-reaction, while closing returns have a tendency towards under-reaction. We suggest that it is these differences that cause a substantial proportion (although not all) of the asymmetric return patterns associated with opening and closing returns. © 2005 Elsevier Inc. All rights reserved.

Opening returns, noise and overreaction

In this article a partial-adjustment model, which shows how equity prices fail to adjust instantaneously to new information, is estimated using a Kalman filter. For the components of the Dow Jones Industrial 30 index I aim to identify whether overreaction or noise is the cause of serial correlation and high volatility associated with opening returns. I find that the tendency for overreaction in opening prices is much stronger than for closing prices; therefore, overreaction rather than noise may account for differences in the return behavior of opening and closing returns.

Do external funds yield lower returns? Recent evidence from East Asian economies

One of the central explanations of the recent Asian Crisis has been the problem of moral hazard as the source of over-investment and excessive external borrowing. There is however rather limited firm-level empirical evidence to characterise inefficient use of internal and external finances. Using a large firm-level panel data-set from four badly affected Asian countries, this paper compares the rates of return to various internal and external funds among firms with low and high debt financing (relative to equity) among financially constrained and other firms. Selectivity-corrected estimates obtained from random effects panel data model do suggest evidence of significantly lower rates of return to long-term debt, even among firms relying more on debt relative to equity in our sample. There is also evidence that average effective interest rates often significantly exceeded the average returns to long-term debt in the sample countries in the pre-crisis period. © 2006 Elsevier Inc. All rights reserved.

Using non-parametric search algorithms to forecast daily excess stock returns

Are the learning procedures of genetic algorithms (GAs) able to generate optimal architectures for artificial neural networks (ANNs) in high frequency data? In this experimental study,GAs are used to identify the best architecture for ANNs. Additional learning is undertaken by the ANNs to forecast daily excess stock returns. No ANN architectures were able to outperform a random walk,despite the finding of non-linearity in the excess returns. This failure is attributed to the absence of suitable ANN structures and further implies that researchers need to be cautious when making inferences from ANN results that use high frequency data.

Using monthly returns to model conditional heteroscedasticity

This empirical study examines the extent of non-linearity in a multivariate model of monthly financial series. To capture the conditional heteroscedasticity in the series, both the GARCH(1,1) and GARCH(1,1)-in-mean models are employed. The conditional errors are assumed to follow the normal and Student-t distributions. The non-linearity in the residuals of a standard OLS regression are also assessed. It is found that the OLS residuals as well as conditional errors of the GARCH models exhibit strong non-linearity. Under the Student density, the extent of non-linearity in the GARCH conditional errors was generally similar to those of the standard OLS. The GARCH-in-mean regression generated the worse out-of-sample forecasts.

Predicting returns in U.S. financial sector indices

This study focuses on: (i) the responsiveness of the U.S. financial sector stock indices to foreign exchange (FX) and interest rate changes; and, (ii) the extent to which good model specification can enhance the forecasts from the associated models. Three models are considered. Only the error-correction model (ECM) generated efficient and consistent coefficient estimates. Furthermore, a simple zero lag model in differences which is clearly mis-specified, generated forecasts that are better than those of the ECM, even if the ECM depicts relationships that are more consistent with economic theory. In brief, FX and interest rate changes do not impact on the return-generating process of the stock indices in any substantial way. Most of the variation in the sector stock indices is associated with past variation in the indices themselves and variation in the market-wide stock index. These results have important implications for financial and economic policies.

The sensitivity of US banks' stock returns to interest and exchange rate changes

Purpose – The purpose of this paper is to investigate the impact of foreign exchange and interest rate changes on US banks’ stock returns. Design/methodology/approach – The approach employs an EGARCH model to account for the ARCH effects in daily returns. Most prior studies have used standard OLS estimation methods with the result that the presence of ARCH effects would have affected estimation efficiency. For comparative purposes, the standard OLS estimation method is also used to measure sensitivity. Findings – The findings are as follows: under the conditional t-distributional assumption, the EGARCH model generated a much better fit to the data although the goodness-of-fit of the model is not entirely satisfactory; the market index return accounts for most of the variation in stock returns at both the individual bank and portfolio levels; and the degree of sensitivity of the stock returns to interest rate and FX rate changes is not very pronounced despite the use of high frequency data. Earlier results had indicated that daily data provided greater evidence of exposure sensitivity. Practical implications – Assuming that banks do not hedge perfectly, these findings have important financial implications as they suggest that the hedging policies of the banks are not reflected in their stock prices. Alternatively, it is possible that different GARCH-type models might be more appropriate when modelling high frequency returns. Originality/value – The paper contributes to existing knowledge in the area by showing that ARCH effects do impact on measures of sensitivity.

Cause, effect and benefits of a standardised corporate visual identity system of UK companies operating in Malaysia

Investigates the degree of global standardisation of a corporate visual identity system (CVIS) in multinational operations. A special emphasis of this research is accorded to UK companies operating in Malaysia. In particular, the study seeks to reveal the reasons for developing a standardised CVIS; the behavioural issues associated with CVIS; and the determination in selecting a graphic design agency. The findings of the research revealed that multinational corporations in an increasingly corporate environment adopted a standardised CVIS for several reasons, including, aiding the sale of products and services, creating an attractive environment for hiring employees, and increasing the company’s stature and presence. Further findings show that the interest in global identity was stimulated by global restructuring, merger or acquisition. The above trends help explain why increased focus has been accorded to CVIS over the past five years by many UK companies operating in Malaysia. Additional findings reveal that both the UK design agencies and in-house design department are used in the development of the firms’ CVIS.

Prevalence of the use of cancer related self-tests by members of the public:A community survey

Background: Self-tests are those where an individual can obtain a result without recourse to a health professional, by getting a result immediately or by sending a sample to a laboratory that returns the result directly. Self-tests can be diagnostic, for disease monitoring, or both. There are currently tests for more than 20 different conditions available to the UK public, and self-testing is marketed as a way of alerting people to serious health problems so they can seek medical help. Almost nothing is known about the extent to which people self-test for cancer or why they do this. Self-tests for cancer could alter perceptions of risk and health behaviour, cause psychological morbidity and have a significant impact on the demand for healthcare. This study aims to gain an understanding of the frequency of self-testing for cancer and characteristics of users. Methods: Cross-sectional survey. Adults registered in participating general practices in the West Midlands Region, will be asked to complete a questionnaire that will collect socio-demographic information and basic data regarding previous and potential future use of self-test kits. The only exclusions will be people who the GP feels it would be inappropriate to send a questionnaire, for example because they are unable to give informed consent. Freepost envelopes will be included and non-responders will receive one reminder. Standardised prevalence rates will be estimated. Discussion: Cancer related self-tests, currently available from pharmacies or over the Internet, include faecal occult blood tests (related to bowel cancer), prostate specific antigen tests (related to prostate cancer), breast cancer kits (self examination guide) and haematuria tests (related to urinary tract cancers). The effect of an increase in self-testing for cancer is unknown but may be considerable: it may affect the delivery of population based screening programmes; empower patients or cause unnecessary anxiety; reduce costs on existing healthcare services or increase demand to investigate patients with positive test results. It is important that more is known about the characteristics of those who are using self-tests if we are to determine the potential impact on health services and the public. © 2006 Wilson et al; licensee BioMed Central Ltd.

Mean reversion in the short horizon returns of UK portfolios

This paper will show that short horizon stock returns for UK portfolios are more predictable than suggested by sample autocorrelation co-efficients. Four capitalisation based portfolios are constructed for the period 1976–1991. It is shown that the first order autocorrelation coefficient of monthly returns can explain no more than 10% of the variation in monthly portfolio returns. Monthly autocorrelation coefficients assume that each weekly return of the previous month contains the same amount of information. However, this will not be the case if short horizon returns contain predictable components which dissipate rapidly. In this case, the return of the most recent week would say a lot more about the future monthly portfolio return than other weeks. This suggests that when predicting future monthly portfolio returns more weight should be given to the most recent weeks of the previous month, because, the most recent weekly returns provide the most information about the subsequent months' performance. We construct a model which exploits the mean reverting characteristics of monthly portfolio returns. Using this model we forecast future monthly portfolio returns. When compared to forecasts that utilise the autocorrelation statistic the model which exploits the mean reverting characteristics of monthlyportfolio returns can forecast future returns better than the autocorrelation statistic, both in and out of sample.

Risk, seasonality and the asymmetric behaviour of stock returns

For some time there has been a puzzle surrounding the seasonal behaviour of stock returns. This paper demonstrates that there is an asymmetric relationship between systematic risk and return across the different months of the year for both large and small firms. In the case of both large and small firms systematic risk appears to be priced in only two months of the year, January and April. During the other months no persistent relationship between systematic risk and return appears to exist. The paper also shows that when systematic risk is priced, the size of the systematic risk premium is higher for large firms than for small firms and varies significantly across the months of the year.

An empirical investigation of the effect of rights issue announcements on share returns and the determinants of abnormal returns on the Kuala Lumpur Stock Exchange

This thesis examines the effect of rights issue announcements on stock prices by companies listed on the Kuala Lumpur Stock Exchange (KLSE) between 1987 to 1996. The emphasis is to report whether the KLSE is semi strongly efficient with respect to the announcement of rights issues and to check whether the implications of corporate finance theories on the effect of an event can be supported in the context of an emerging market. Once the effect is established, potential determinants of abnormal returns identified by previous empirical work and corporate financial theory are analysed. By examining 70 companies making clean rights issue announcements, this thesis will hopefully shed light on some important issues in long term corporate financing. Event study analysis is used to check on the efficiency of the Malaysian stock market; while cross-sectional regression analysis is executed to identify possible explanators of the rights issue announcements' effect. To ensure the results presented are not contaminated, econometric and statistical issues raised in both analyses have been taken into account. Given the small amount of empirical research conducted in this part of the world, the results of this study will hopefully be of use to investors, security analysts, corporate financial managements, regulators and policy makers as well as those who are interested in capital market based research of an emerging market. It is found that the Malaysian stock market is not semi strongly efficient since there exists a persistent non-zero abnormal return. This finding is not consistent with the hypothesis that security returns adjust rapidly to reflect new information. It may be possible that the result is influenced by the sample, consisting mainly of below average size companies which tend to be thinly traded. Nevertheless, these issues have been addressed. Another important issue which has emerged from the study is that there is some evidence to suggest that insider trading activity existed in this market. In addition to these findings, when the rights issue announcements' effect is compared to the implications of corporate finance theories in predicting the sign of abnormal returns, the signalling model, asymmetric information model, perfect substitution hypothesis and Scholes' information hypothesis cannot be supported.

Representational modes of thinking employed by children aged thirteen and fourteen, and their relationship to performance in standardised tests of ability, measures of creativity and personality

This thesis proposes that despite many experimental studies of thinking, and the development of models of thinking, such as Bruner's (1966) enactive, iconic and symbolic developmental modes, the imagery and inner verbal strategies used by children need further investigation to establish a coherent, theoretical basis from which to create experimental curricula for direct improvement of those strategies. Five hundred and twenty-three first, second and third year comprehensive school children were tested on 'recall' imagery, using a modified Betts Imagery Test; and a test of dual-coding processes (Paivio, 1971, p.179), by the P/W Visual/Verbal Questionnaire, measuring 'applied imagery' and inner verbalising. Three lines of investigation were pursued: 1. An investigation a. of hypothetical representational strategy differences between boys and girls; and b. the extent to which strategies change with increasing age. 2. The second and third year children's use of representational processes, were taken separately and compared with performance measures of perception, field independence, creativity, self-sufficiency and self-concept. 3. The second and third year children were categorised into four dual-coding strategy groups: a. High Visual/High Verbal b. Low Visual/High Verbal c. High Visual/Low Verbal d. Low Visual/Low Verbal These groups were compared on the same performance measures. The main result indicates that: 1. A hierarchy of dual-coding strategy use can be identified that is significantly related (.01, Binomial Test) to success or failure in the performance measures: the High Visual/High Verbal group registering the highest scores, the Low Visual/High Verbal and High Visual/Low Verbal groups registering intermediate scores, and the Low Visual/Low Verbal group registering the lowest scores on the performance measures. Subsidiary results indicate that: 2. Boys' use of visual strategies declines, and of verbal strategies increases, with age; girls' recall imagery strategy increases with age. Educational implications from the main result are discussed, the establishment of experimental curricula proposed, and further research suggested.