On the performance of the tick test

In financial research, the sign of a trade (or identity of trade aggressor) is not always available in the transaction dataset and it can be estimated using a simple set of rules called the tick test. In this paper we investigate the accuracy of the tick test from an analytical perspective by providing a closed formula for the performance of the prediction algorithm. By analyzing the derived equation, we provide formal arguments for the use of the tick test by proving that it is bounded to perform better than chance (50/50) and that the set of rules from the tick test provides an unbiased estimator of the trade signs. On the empirical side of the research, we compare the values from the analytical formula against the empirical performance of the tick test for fifteen heavily traded stocks in the Brazilian equity market. The results show that the formula is quite realistic in assessing the accuracy of the prediction algorithm in a real data situation.

Measuring European real estate investment performance: A comparison of different approaches

The performance of real estate investment markets is difficult to monitor because the constituent assets are heterogeneous, are traded infrequently and do not trade through a central exchange in which prices can be observed. To address this, appraisal based indices have been developed that use the records of owners for whom buildings are regularly re-valued. These indices provide a practical solution to the measurement problem, but have been criticised for understating volatility and not capturing market turning points in a timely manner. This paper evaluates alternative ‘Transaction Linked Indices’ that are estimated using an extension of the hedonic method for index construction and with Investment Property Databank data. The two types of indices are compared over Q4 2001 to Q4 2012 in order to examine whether movements in these indices are consistent. The Transaction Linked Indices show stronger growth and sharper declines than their appraisal based counterparts over the course of the cycle in different European markets and they are typically two to four times more volatile. However, they have some limitations; for instance, only country level indicators can be published in many cases owing to low trading volumes in the period studied.

Developing construction professional services in the international market: a SWOT analysis of China

In contrast to their bustling construction counterparts, Chinese construction professional services (CPS) such as architecture, engineering, and consultancy, seem still to be stagnant in the international market. CPS are not only high value-added profit centers in their own right, but also have a knock-on effect on subsequent businesses such as construction, and the export of materials and machinery. Arguably, competition in the international construction market has shifted to knowledge-intensive CPS. Yet,CPS represent a research area that has been paid scant attention. This research aims to add to the body of knowledge of CPS by examining strengths, weaknesses, opportunities, and threats (SWOT) of Chinese CPS (CCPS) in the international context. It does so by triangulating theories with quantitative and qualitative data gleaned from yearbooks, annual reports, interviews, seminars, and interactions with managers in major CCPS companies. It is found that CCPS present both strengths and weaknesses in talents, administration systems, and development strategies in dealing with the external opportunities and threats brought about by globalization and market evolvement. Low price, which has helped the Chinese construction business to succeed in the international market, is also a CCPS major strength. An opportunity for CCPS is the relatively strong delivery capability possessed by Chinese contractors. By partnering with them CCPS can better edge into the international arena. This is probably the first ever comprehensive study in investigating the performance of CCPS in the international market. The research is also timely, particularly when the world is witnessing the burgeoning force of Chinese businesses in many areas including manufacturing, construction, and potentially, professional services.

Catch-up strategies in the Indian auto components industry: domestic firms’ responses to market liberalization

Market liberalization in emerging-market economies and the entry of multinational firms spur significant changes to the industry/institutional environment faced by domestic firms. Prior studies have described how such changes tend to be disruptive to the relatively backward domestic firms, and negatively affect their performance and survival prospects. In this paper, we study how domestic supplier firms may adapt and continue to perform, as market liberalization progresses, through catch-up strategies aimed at integrating with the industry's global value chain. Drawing on internalization theory and the literatures on upgrading and catch-up processes, learning and relational networks, we hypothesize that, for continued performance, domestic supplier firms need to adapt their strategies from catching up initially through technology licensing/collaborations and joint ventures with multinational enterprises (MNEs) to also developing strong customer relationships with downstream firms (especially MNEs). Further, we propose that successful catch-up through these two strategies lays the foundation for a strategy of knowledge creation during the integration of domestic industry with the global value chain. Our analysis of data from the auto components industry in India during the period 1992–2002, that is, the decade since liberalization began in 1991, offers support for our hypotheses.

Islamic mutual funds' financial performance and international investment style: evidence from 20 countries

We pursue the first large-scale investigation of a strongly growing mutual fund type: Islamic funds. Based on an unexplored, survivorship bias-adjusted data set, we analyse the financial performance and investment style of 265 Islamic equity funds from 20 countries. As Islamic funds often have diverse investment regions, we develop a (conditional) three-level Carhart model to simultaneously control for exposure to different national, regional and global equity markets and investment styles. Consistent with recent evidence for conventional funds, we find Islamic funds to display superior learning in more developed Islamic financial markets. While Islamic funds from these markets are competitive to international equity benchmarks, funds from especially Western nations with less Islamic assets tend to significantly underperform. Islamic funds’ investment style is somewhat tilted towards growth stocks. Funds from predominantly Muslim economies also show a clear small cap preference. These results are consistent over time and robust to time varying market exposures and capital market restrictions.

The cross-currency hedging performance of implied versus statistical forecasting models

This article examines the ability of several models to generate optimal hedge ratios. Statistical models employed include univariate and multivariate generalized autoregressive conditionally heteroscedastic (GARCH) models, and exponentially weighted and simple moving averages. The variances of the hedged portfolios derived using these hedge ratios are compared with those based on market expectations implied by the prices of traded options. One-month and three-month hedging horizons are considered for four currency pairs. Overall, it has been found that an exponentially weighted moving-average model leads to lower portfolio variances than any of the GARCH-based, implied or time-invariant approaches.

The impact of economic and financial factors on UK property performance

This paper employs a vector autoregressive model to investigate the impact of macroeconomic and financial variables on a UK real estate return series. The results indicate that unexpected inflation, and the interest rate term spread have explanatory powers for the property market. However, the most significant influence on the real estate series are the lagged values of the real estate series themselves. We conclude that identifying the factors that have determined UK property returns over the past twelve years remains a difficult task.

Predicting stock index volatility: can market volume help?

This paper explores a number of statistical models for predicting the daily stock return volatility of an aggregate of all stocks traded on the NYSE. An application of linear and non-linear Granger causality tests highlights evidence of bidirectional causality, although the relationship is stronger from volatility to volume than the other way around. The out-of-sample forecasting performance of various linear, GARCH, EGARCH, GJR and neural network models of volatility are evaluated and compared. The models are also augmented by the addition of a measure of lagged volume to form more general ex-ante forecasting models. The results indicate that augmenting models of volatility with measures of lagged volume leads only to very modest improvements, if any, in forecasting performance.

Individual assets, market structure and the drivers of return

Much UK research and market practice on portfolio strategy and performance benchmarking relies on a sector‐geography subdivision of properties. Prior tests of the appropriateness of such divisions have generally relied on aggregated or hypothetical return data. However, the results found in aggregate may not hold when individual buildings are considered. This paper makes use of a dataset of individual UK property returns. A series of multivariate exploratory statistical techniques are utilised to test whether the return behaviour of individual properties conforms to their a priori grouping. The results suggest strongly that neither standard sector nor regional classifications provide a clear demarcation of individual building performance. This has important implications for both portfolio strategy and performance measurement and benchmarking. However, there do appear to be size and yield effects that help explain return behaviour at the property level.

Residential property loans and bank performance during property price booms: evidence from Europe

Understanding the performance of banks is of the utmost importance due to the impact the sector may have on economic growth and financial stability. Residential mortgage loans constitute a large proportion of the portfolio of many banks and are one of the key assets in the determination of their performance. Using a dynamic panel model, we analyse the impact of residential mortgage loans on bank profitability and risk, based on a sample of 555 banks in the European Union (EU-15), over the period from 1995 to 2008. We find that an increase in residential mortgage loans seems to improve bank’s performance in terms of both profitability and credit risk in good market, pre-financial crisis, conditions. These findings may aid in explaining why banks rush to lend to property during booms because of the positive effect it has on performance. The results also show that credit risk and profitability are lower during the upturn in the residential property cycle.

Multinational subsidiary sales and performance in South East Asia

We extend the theory of the multinational enterprise (MNE) by exploring the concept of subsidiary-specific advantages (SSAs) as a driver for subsidiary performance. We investigate the relationship of host country-specific advantages (host CSAs) in the form of market attractiveness, SSAs and subsidiary sales as they affect subsidiary performance. From an original primary dataset of 101 British multinational (MNE) subsidiaries in six South East Asian countries, our analysis reveals three significant findings. First, host market attractiveness has a statistically positive impact on the performance of subsidiaries. Second, the three traditional SSAs of general management, marketing capabilities and invested capital enhance subsidiary performance. Third, we examine geographic direction and types of customers for subsidiary sales by following international accounting standards. We find that these subsidiaries generate on average 95 percent of total sales from the Asia Pacific region and 91 percent of total sales from external customers. Our findings have important research and managerial implications.

The RELQUAL scale: a measure of relationship quality in export market ventures

In this article, the authors develop a new measurement scale (the RELQUAL scale) to assess the degree of relationship quality between the exporting firm and the importer. Relationship quality is presented as a high-order concept. Findings reveal that a better quality of the relationship results in a greater (1) amount of information sharing, (2) communication quality, (3) long-term orientation, as well as (4) satisfaction with the relationship. The four multi-item scales show strong evidence of reliability as well as convergent, discriminant and nomological validity in a sample of British exporters. Findings also reveal that relationship quality is positively and significantly associated with export performance. Suggestions for applying the measure in future research are presented.

Paying for long-term performance: restructuring bankers’ pay for risk regulation

The purpose of this paper is to propose hybrid capital securities as a new approach to compensation for senior bank executives and risk-takers instead of cash or equity-based compensation currently adopted by the industry. The global financial turmoil indicated that misaligned pay-for-performance compensation arrangements encouraged management short-termism and rewarded excessive risk-taking behaviour in Anglo-Saxon system. Rather than regulating specific instruments and processes, we believe that it is much more efficient to overhaul the compensation scheme to align it with risk management and governance. This empirical paper investigates the European hybrid market by employing data from the Merrill Lynch Global Index System from 2000 to 2010. Our paper contributes to both literature and practices by designing a structured scheme to tie the executive’s interests to long-term performance of the bank, the goal of regulators and the economy at large which consequently reduce the probability of future bank failures.

Energy performance ratings and house prices in Wales: an empirical study

This paper investigates the price effect of EPC ratings on the residential dwelling prices in Wales. It examines the capitalisation of energy efficiency ratings into house prices using two approaches. The first adopts a cross-sectional framework to investigate the effect of EPC band (and EPC rating) on a large sample of dwelling transactions. The second approach is based on a repeat-sales methodology to examine the impact of EPC band and rating on house price appreciation. The results show that, controlling for other price influencing dwelling characteristics, EPC band does affect house prices. This observed influence of EPC on price may not be a result of energy performance alone; the effect may be due to non-energy related benefits associated with certain types, specifications and ages of dwellings or there may be unobserved quality differences unrelated to energy performance such as better quality fittings and materials. An analysis of the private rental segment reveals that, in contrast to the general market, low-EPC rated properties were not traded at a significant discount, suggesting different implicit prices of potential energy savings for landlords and owner-occupiers.

Can institutional investors bias real estate portfolio appraisals? Evidence from the market downturn

This paper investigates the extent to which institutional investors may have influenced independent real estate appraisals during the financial crisis. A conceptual model of the determinants of client influence on real estate appraisals is proposed. It is suggested that the extent of clients’ ability and willingness to bias appraisal outputs is contingent upon market and regulatory environments (ethical norms and legal and institutional frameworks), the salience of the appraisal(s) to the client, financial incentives for the appraiser to respond to client pressure, organisational culture, the level of moral reasoning of both individual clients and appraisers, client knowledge and the degree of appraisal uncertainty. The potential of client influence to bias ostensibly independent real estate appraisals is examined using the opportunity afforded by the market downturn commencing in 2007 in the UK. During the market turbulence at the end of 2007, the motivations of different types of owners to bias appraisals diverged clearly and temporarily provided a unique opportunity to assess potential appraisal bias. We use appraisal-based performance data for individual real estate assets to test whether there were significant ownership effects on performance during this period. The results support the hypothesis that real estate appraisals in this period reflected the differing needs of clients.