Contrarian Investment and Macroeconomic Risk

It is now widely accepted that contrarian, or value investment strategies deliver superior returns. Gregory, Harris and Michou (2001) examine the performance of contrarian investment strategies in the UK and find that value strategies formed on the basis of a wide range of measures of value have delivered excess returns that are both statistically and economically significant. However, while value strategies appear to be profitable, the reason for their superior perform‐ ance is far from clear. Under the contrarian model, value strategies are profitable because they are contrarian to naïve strategies such as those that erroneously extrapolate past performance, while under the rational pricing model, value strategies are profitable because they are fundamentally riskier in some sense. In this paper, we discriminate between these two possibilities by undertaking a comprehensive investigation of the relationship between the returns to value investment strategies and various macroeconomic state variables that in a multi‐factor asset pricing model could reasonably be taken as proxies for risk. Moreover, we examine whether the returns to value strategies predict future GDP, consumption and investment growth over and above the contribution of the Fama and French (1993 and 1996) SMB, HML and market factors. While the SMB and HML factors behave in a manner consistent with the rational pricing model, we show that some value strategies in the UK are able to generate excess returns that do not seem to be related to known risk factors.     

Contrarian Investment Strategies in a European Context

In this paper we study value strategies for four European countries (France, Germany, the Netherlands and the United Kingdom). We find an outperformance for all four value variables which are investigated: the earnings-to-price (E/P) ratio, the cash-flow-to-price (CF/P) ratio, the book-to-market (B/M) ratio and the dividend yield. This outperformance is especially remarkable for the CF/P ratio, which amounts to 20.8% between the top and bottom quintiles in a univariate model. In a regression analysis, in which all four value variables as well as a correction for the size effect are taken into account, we find a difference of 11.8% for the CF/P ratio. We demonstrate that this result cannot be explained by risk differences alone. Our findings confirm the outperformance of value strategies as found earlier by Chan, Hamao and Lakonishok (1991) and Lakonishok, Shleifer and Vishny (1994) for Japan and the United States respectively.     

An Analysis of Contrarian Investment Strategies in the UK

The performance of contrarian, or value strategies – those that invest in stocks that have low market value relative to a measure of their fundamentals – continues to attract attention from researchers and practitioners alike. While there is much extant evidence on the profitability of value strategies, however, most of this evidence pertains to the US. In this paper, we provide a detailed characterisation of value strategies using data on UK stocks for the period 1975 to 1998. We first undertake simple one-way and two-way classifications of stocks in which value is defined using both past performance and expected future performance. Using sales growth as a proxy for past performance and book-to-market, earnings yield and cash flow yield as measures of expected future performance, we find that that stocks that have both poor past performance and low expected future performance have significantly higher returns than those that have either good past performance or good expected future performance. Allowing for size effects in returns reduces the value premium but it nevertheless remains significant. We go on to explore whether the profitability of value strategies in the UK can be explained using the three factor model of Fama and French (1996). Broadly consistent with the results for the US, we find that using the one-way classification the excess returns to almost all value strategies can be explained by their loading on the market, book-to-market and size factors. However, in contrast with the US, using the two-way classification there are excess returns to value strategies based on book-to-market and sales growth, even after controlling for their loading on the market, book-to-market and size factors.     

Momentum in the Chinese Stock Market: Evidence from Stochastic Oscillator Indicators

ABSTRACT

We explore whether investors earn profits through the use of stochastic oscillator indicators (SOI) for trading stocks. The results reveal that investors might use momentum strategies when trading constituent stocks of SSE 50 as the overbought trading signals emitted by SOI. We infer that the results might be caused by herding behaviors of Chinese investors since overoptimistic moods are likely to exist as evidenced by the 80 percent trading volume traded by individual investors in the Chinese stock market.     

Does the Momentum Strategy Work Universally? Evidence from the Japanese Stock Market

This paper investigates effectiveness of momentum strategies in the Japanese stock market during the period of 1975 to 1997. The main findings of this research are that momentum strategy portfolios which invest in past three-to-twelve month winners and sell past three-to-twelve month losers lose about 0.5% per month over the subsequent three to twelve months. This means that stock prices in the Japanese stock market reverse rather than continue over a medium-term horizon. The most significant reversal pattern is observed at the first month of portfolio formation and is unique to small stocks. Even with the market risk and size factor controlled, the price reversal is still present.     

Short-term Contrarian Strategies in the London Stock Exchange: Are They Profitable? Which Factors Affect Them?

Abstract:  This paper provides evidence on short-term contrarian profits and their sources for the London Stock Exchange. Profits are decomposed to sources due to factors derived from the Fama and French (1996) three-factor model. For the empirical testing, size-sorted sub-samples are used, and adjustments for infrequent trading and bid-ask biases are also made. Results indicate that UK short-term contrarian strategies are profitable and more pronounced for extreme market capitalization stocks. These profits persist even when the sample is adjusted for market frictions, risk, seasonality, and irrespective of whether equally-weighted or value-weighted portfolios are employed. The most important factor that drives contrarian profits appears to be investor overreaction to firm-specific information.     

International investment patterns: Evidence using a new dataset

This paper examines the bilateral, source and host factors driving portfolio equity investment across a set of countries using International Monetary Fund's new dataset on international equity holdings at the end of 1997, 2001 and 2002.The paper finds that the bilateral equity investment is strongly correlated with the underlying patterns of trade in goods and services. The information asymmetries and cultural-institutional proximity are important for bilateral equity investment. The size of domestic stock market is the key correlate of aggregate foreign portfolio equity asset and liability holdings. The scale of aggregate foreign equity asset holdings is larger for countries having high income per capita.     

REITs风险收益特征及其资产配置作用

REITs具有“长期收益率高于股票、波动性低于股票”的风险／收益特征，更为重要的是REITs与股票、债券的相关系数低。机构投资者的传统组合中通常只包括债券、股票类证券，加AREITs可使组合优化，即组合有效边界向左上方移动，意味着在相同风险水平下，增加REITs后的组合可获得更高收益，或是为取得相同收益水平，增加REITs后的组合只承担更低风险。     

Robust Estimation of Beta Coefficients: Evidence from a Small Stock Market

In this paper we demonstrate that robust estimators improve the reliability of estimates of beta coefficients on small, thinly traded stock markets. We outline several different types of robust and bounded influence regression estimators and assess them using a jackknife methodology on data from the Johannesburg Stock Exchange. The empirical evidence confirms the hypothesis that robust estimators are more efficient than least squares estimators and indicates that least squares estimators may over-estimate systematic risk in some cases.     

Consumption-smoothing in a small, cyclically volatile open economy: Evidence from New Zealand

New Zealand's current account of the balance of payments has been persistently in deficit since the early 1970s and increased markedly during the late 1990s. Should this cause significant concern, for such a small, cyclically volatile open economy? Our results show that VAR1 and VAR2 forms of the traditional intertemporal consumption-smoothing model reflect very satisfactorily the volatile directions and turning points observed, that the data are not consistent with consumption-tilting to the present, and that New Zealand has had considerable success to date in consumption-smoothing around its average 5% current account deficit. Perhaps more unexpectedly, a Bergin–Sheffrin-type model of a small open economy with variable interest rates and exchange rates has not performed noticeably better.     

An Examination of Audit Delay: Further Evidence from New Zealand

An important qualitative attribute of financial statements is timeliness. The recognition that the length of the audit may be the single most important determinant affecting the timing of earnings' announcements has motivated recent research on audit delay. The present study extends prior research by examining the multivariate relationship between a set of explanatory variables and audit delay for a large sample of New Zealand public companies. Further, the study includes two explanatory variables, company control (i.e. owner control versus manager control) and debt proportion, which have not previously been considered. The results indicate that both company size and sign of income significantly affect audit delay across the two years examined. Five other explanatory variables significantly affected audit delay for one of the two years examined. The adjusted R2s of the regression models, however, were relatively low. Additional analysis was also performed on each company control subsample. These results revealed that the effect of company size and income sign may be conditional upon company control. Implications from the results of the study for future research are discussed.     

The Cross-Section of Expected Stock Returns: New Evidence from an Emerging Market

Over 300 factors have been found to explain the cross-section of expected stock returns. Empirical studies also show that findings from multifactor asset-pricing models have not been consistent in an emerging market. Using DuPont analysis and a residual income valuation model for 284 nonfinancial companies on Ho Chi Minh Stock Exchange during the period 2008–2014, findings suggest that the return on equity and its change are informative for stock returns in Vietnam. In addition, the level of capital turnover, financial cost ratio (FCR), and changes in capital and in the FCR contain incremental explanatory power for stock returns.     

Cultural relativity of accounting professionalism: Evidence from New Zealand and Samoa

This study investigates the value orientations of two culturally distinct countries in the South Pacific, namely, Samoa and New Zealand, with a view to providing empirical evidence on the relationships between accounting and culture. It uses Rokeach's value survey (1973), Schwartz and Bilsky's motivational domains (1987, 1990), and Hofstede–Gray framework to establish the possible linkages between values and accounting professionalism. The results provide culture-related evidence that suggests the possibility for the existence of major differences in the levels of accounting professionalism in the two countries. This study may have implications for the application of International Financial Reporting Standards (IFRS) and the analysis of differences in judgments of professional accountants on measurement, disclosure, and ethical issues. It is the first substantial accounting study on Samoa.     

The Free Cash Flow Anomaly Revisited: Finnish Evidence

Abstract:  This paper examines the performance of an investment strategy based on free cash flows using financial statement data of Finnish companies during the period 1992-2002. The analysis in this paper is motivated by the so-called free cash flow anomaly previously documented e.g. in Hackel, Livnat and Rai (2000) . Using annual financial statement information, we identify large-capitalization companies with positive free cash flows, low free cash flow multiples, and low financial leverage. Since a portfolio of these companies is found to consistently outperform the market index, our results suggest that the free cash flow anomaly also exists in the Finnish stock market.     

Non-audit Services and Auditor Independence: New Zealand Evidence

Abstract:  This paper examines evidence in New Zealand about whether auditors providing more non-audit services are less independent. Three sets of tests are used to address the issue. The first examines whether there is a relation between non-audit fees and audit fees, the second examines whether there is a relation between non-audit fees and audit report qualification or modification, and the third examines whether there is a relation between non-audit fees and stability of audit tenure. The results suggest a potential for the impairment of auditor independence in appearance when auditors provide non-audit services but no evidence of any impact on independence of mind.     

The Dividend Pricing Model: New Evidence from the Korean Housing Market

It is generally conceded that dividend pricing models are poor predictors of asset prices. This finding is sometimes attributed to excess volatility or to a dividend process manipulated by firm managers. In this paper, we present rather powerful panel tests of the dividend pricing relation using a unique data set in which dividends are set by market forces independent of managers' preferences. We rely on observations on the market for condominium dwellings in Korea—perhaps the only market in which information on dividends and prices is publicly and continuously available to consumers and investors. We extend the “dividend-price ratio model” to panels of housing returns and rents differentiated by type and location. We find broad support for the dividend pricing model during periods both before and after the Asian Financial Crisis of 1997–1998, suggesting that the market for housing assets in Korea has been remarkably efficient. Previous versions of this paper were presented at the Hong Kong-Singapore International Real Estate Research Symposium, August 2004, Hong Kong and the meeting of the Hong Kong Economic Association, January 2005. We are grateful for the comments of Ashok Bardhan, Yuming Fu, Chinmoy Ghosh, Lok Sang Ho, Charles Ka Yui Leung, Sau Kim Lum and Seow Eng Ong. Son's research was supported by the Konkuk University and Hwang's research was supported by the National University of Singapore.     

The role of accruals and cash flows in explaining security returns: Evidence from New Zealand

This paper empirically examines the relative and incremental information content of earnings and cash flows and the role of firm-specific contextual factors in moderating information content in New Zealand. Accounting earnings are considered to be the premier information source for decision making and a substantial volume of literature, primarily in the United States, shows that earnings provide superior information to that of cash flows. However, significant reporting differences in New Zealand warrant and investigation of the role of earnings and cash flows to explain security returns. Results show that (a) earnings have higher explanatory power than cash flows, although the difference is not statistically significant, and (b) both earnings and cash flows have incremental information content for stock returns. Further analysis shows that the valuation role of earnings and cash flows is moderated by firm-specific factors.     

The dynamics of price discovery for cross-listed shares: Evidence from Australia and New Zealand

This paper studies the dynamics of price discovery for markets with bilateral cross-listings. Using a sample of four Australian stocks cross-listed in New Zealand and five New Zealand stocks cross-listed in Australia for the period January 2002 to December 2007, we assess Hasbrouck (1995) information shares and Grammig et al. (2005) conditional information shares over time. We observe that in both cases the home market is dominant in terms of price discovery. However, when studying price discovery over time, we find that the importance of the Australian market (the larger of the two markets) is increasing for both Australian and New Zealand domiciled firms. Finally, using panel regression analysis, we find that the growth in the importance of the Australian market is positively related to the growth in the size of the firm and negatively related to the size of the percentage spread in the Australian market, implying that as firms grow larger and their cost of trading in Australia declines, the Australian market becomes more informative.     

Feasible momentum strategies: Evidence from the Swiss stock market

While there is little controversy on the profitability of momentum strategies, their implementation is afflicted with many difficulties. Most important, chasing momentum can generate high turnover. Though there are already several attempts to make momentum strategies less expensive with respect to transaction costs, we go a step further in the simplification of momentum strategies. By restricting our sample to Switzerland’s largest blue-chip stocks and choosing only one winner and one loser stock, we find average returns to our momentum arbitrage portfolios of up to 44% p.a. depending on the formation and holding periods. While unconditional risk models are at odds with momentum profits, stock market predictability and time-varying expected returns explain a large part of the momentum payoffs, including the post-holding period behavior of the winner and loser stocks (overreaction and subsequent price correction).

Market Efficiency and the Returns to Simple Technical Trading Rules: New Evidence from U.S. Equity Market and Chinese Equity Markets

Numerous studies in the finance literature have investigated technical analysis to determine its validity as an investment tool. This study is an attempt to explore whether some forms of technical analysis can predict stock price movement and make excess profits based on certain trading rules in markets with different efficiency level. To avoid using arbitrarily selected 26 trading rules as did by Brock, Lakonishok and LeBaron (1992) and later by Bessembinder and Chan (1998), this paper examines predictive power and profitability of simple trading rules by expanding their universe of 26 rules to 412 rules. In order to find out the relationship between market efficiency and excess return by applying trading rules, we examine excess return over periods in U.S. markets and also compare the excess returns between U.S. market and Chinese markets. Our results found that there is no evidence at all supporting technical forecast power by these trading rules in U.S. equity index after 1975. During the 1990s break-even costs turned to be negative, –0.06%, even failing to beat a buy-holding strategyin U.S. equity market. In comparison, our results provide support for the technical strategies even in the presence of trading cost in Chinese stock markets.