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Article
Publication date: 5 August 2016

William Beaver, Maureen McNichols and Richard Price

We highlight key assumptions implicit in the models used by academics conducting research on market efficiency. Most notably, many academics assume that investors can…

Abstract

We highlight key assumptions implicit in the models used by academics conducting research on market efficiency. Most notably, many academics assume that investors can borrow unlimited amounts and construct long-short portfolios at zero cost. We relax these assumptions and examine the attractiveness of long-short strategies as stand-alone investments and as a part of a diversified portfolio. Our analysis illustrates that the key benefit of long-short investing is adding diversification to a portfolio beyond what the market provides. We show that as stand-alone investments, nontrivial risk remains in the “hedge” strategies and that the returns generally do not beat the market in a head-to-head contest. Our findings raise questions about the degree of inefficiency in anomaly studies because plausible measures of costs generally offset strategy returns. The ability to achieve greater diversification may be, but is not necessarily, due to market inefficiency. We also highlight the key role of the generally ignored but critically important short interest rebate and show that absent this rebate, the long-short strategies we examine generally yield insignificant returns.

Details

Journal of Accounting Literature, vol. 37 no. 1
Type: Research Article
ISSN: 0737-4607

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Article
Publication date: 3 October 2016

Jeremy King and Gary Wayne van Vuuren

This paper aims to investigate the use of the bias ratio as a possible early indicator of financial fraud – specifically in the reporting of hedge fund returns. In the…

Abstract

Purpose

This paper aims to investigate the use of the bias ratio as a possible early indicator of financial fraud – specifically in the reporting of hedge fund returns. In the wake of the 2008-2009 financial crisis, numerous hedge funds were liquidated and several cases of financial fraud exposed.

Design/methodology/approach

Risk-adjusted return metrics such as the Sharpe ratio and Value at Risk were used to raise suspicion for fraud. These metrics, however, assume distributional normality and thus have had limited success with hedge fund returns (a characteristic of which is highly skewed, non-normal return distributions).

Findings

Results indicate that potential fraud would have been detected in the early stages of the scheme’s life. Having demonstrated the credibility of the bias ratio, it was then applied to several indices and (anonymous) South African hedge funds. The results were used to demonstrate the ratio’s scope and robustness and draw attention to other metrics which could be used in conjunction with it. Results from these multiple sources could be used to justify further investigation.

Research limitations/implications

The traditional metrics for performance evaluation (such as the Sharpe ratio), assume distributional normality and thus have had limited success with hedge fund returns (a characteristic of which is highly skewed, non-normal return distributions). The bias ratio, which does not rely on normally distributed returns, was applied to a known fraud case (Madoff’s Ponzi scheme).

Practical implications

The effectiveness of the bias ratio in demonstrating potential suspicious financial activity has been demonstrated.

Originality/value

The financial market has come under heightened scrutiny in the past decade (2005 – 2015) as a result of the fragile and uncertain economic milieu that still (2015) persists. Numerous risk and return measures have been used to evaluate hedge funds’ risk-adjusted performance, but many fail to account for non-normal return distributions exhibited by hedge funds. The bias ratio, however, has been demonstrated to effectively flag potentially fraudulent funds.

Details

Journal of Financial Crime, vol. 23 no. 4
Type: Research Article
ISSN: 1359-0790

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Abstract

Details

Managerial Finance, vol. 31 no. 2
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 27 June 2014

C. Sherman Cheung and Peter Miu

Real estate investment has been generally accepted as a value-adding proposition for a portfolio investor. Such an impression is not only shared by investment…

Abstract

Real estate investment has been generally accepted as a value-adding proposition for a portfolio investor. Such an impression is not only shared by investment professionals and financial advisors but also appears to be supported by an overwhelming amount of research in the academic literature. The benefits of adding real estate as an asset class to a well-diversified portfolio are usually attributed to the respectable risk-return profile of real estate investment together with the relatively low correlation between its returns and the returns of other financial assets. By using the regime-switching technique on an extensive historical dataset, we attempt to look for the statistical evidence for such a claim. Unfortunately, the empirical support for the claim is neither strong nor universal. We find that any statistically significant improvement in risk-adjusted return is very much limited to the bullish environment of the real estate market. In general, the diversification benefit is not found to be statistically significant unless investors are relatively risk averse. We also document a regime-switching behavior of real estate returns similar to those found in other financial assets. There are two distinct states of the real estate market. The low-return (high-return) state is characterized by its high (low) volatility and its high (low) correlations with the stock market returns. We find this kind of dynamic risk characteristics to play a crucial role in dictating the diversification benefit from real estate investment.

Details

Signs that Markets are Coming Back
Type: Book
ISBN: 978-1-78350-931-7

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Article
Publication date: 12 May 2020

Benjamin Schellinger

This paper aims to elaborate on the optimization of two particular cryptocurrency portfolios in a mean-variance framework. In general, cryptocurrencies can be classified…

Abstract

Purpose

This paper aims to elaborate on the optimization of two particular cryptocurrency portfolios in a mean-variance framework. In general, cryptocurrencies can be classified to as coins and tokens where the first can be thought of as a medium of exchange and the latter accounts for security or utility tokens depending upon its design.

Design/methodology/approach

Against this backdrop, this empirical study distinguishes, in particular, between pure coin and token portfolios. Both portfolios are optimized by maximizing the Sharpe ratio and, subsequently, compared with alternative portfolio strategies.

Findings

The empirical findings demonstrate that the maximum utility portfolio of coins, with a risk aversion of λ = 10, outweighs alternative frameworks. The portfolios optimized by maximizing the Sharpe ratio for both coins and tokens indicate a rather poor performance. Testing the maximized utility for different levels of risk aversion confirms the findings of this empirical study and confers them more robustness.

Research limitations/implications

Further investigation is strongly recommended as tokens represent a new phenomenon in the cryptocurrency universe, for which only a limited amount of data are available, which restricts the sampling. Furthermore, future study is to include more sophisticated optimization models using different constraints in portfolio creation.

Practical implications

In light of the persistently substantial volatility in cryptocurrency markets, the empirical findings assert that portfolio managers are advised to construct a global minimum variance portfolio. In the absence of sophisticated optimization models, private investors can invest according to the market values of cryptocurrencies. Despite minor differences in the risk and reward ratios of the portfolios tested, tokens tend to be more speculative, especially, if the Tether token is excluded, which may require enhanced supervision and investor protection by regulating authorities.

Originality/value

As the current literature investigates on diversification effects of blended cryptocurrency portfolios rather than making an explicit distinction, this paper reflects one of the first to explore the investability and role of diversifying coins and tokens using a classic Markowitz approach.

Details

The Journal of Risk Finance, vol. 21 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 10 June 2020

Mahfooz Alam and Valeed Ahmad Ansari

This study aims to empirically compare the performance of Islamic indices vis-à-vis to their conventional counterparts in India.

Abstract

Purpose

This study aims to empirically compare the performance of Islamic indices vis-à-vis to their conventional counterparts in India.

Design/methodology/approach

The performance of the Islamic and selected conventional indices is evaluated using various risk-adjusted performance measures such as Sharpe ratio, Treynor ratio, M-square (M2) ratio, information ratio, capital asset pricing model (CAPM), Fama-French three-factor model and Carhart four-factor model in India context. The period of study is from December 2006 to 2018.

Findings

The risk-adjusted performance measures based on the Sharpe ratio, Treynor ratio, information ratio, the M2 ratio show that the return of Islamic indices provides slightly superior performance. However, performance investigated using CAPM, Fama-French and Carhart benchmarks produce a statistically insignificant differences in return of the Islamic and conventional benchmarks.

Research limitations/implications

The Sharīʿah-compliant indices can provide a viable, ethical and alternative investment avenue for faith-based investors as it will not make them worse off in comparison to the conventional benchmarks. This also offers opportunity to conventional investors for portfolio diversification. The promotion of faith-based investment can serve as a tool for financial inclusion to attract a huge segment of Indian population in the formal financial system. The findings of the study suffer from the limitation of small sample size and empirical methods used.

Originality/value

This study contributes to the literature on the comparative performance of Islamic and conventional indices in general and emerging markets, in particular, using most recent data and covering a relatively long span of time. To the best of the knowledge, this is the first comprehensive study examining the performance of Islamic indices, using multiple Islamic indices and various risk-adjusted measures in the Indian context.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 13 no. 3
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 22 February 2022

Heike Bockius and Nadine Gatzert

The purpose of this article is to investigate the impact of counterparty risk on the basis risk of industry loss warranties as well as on reinsurance with and without…

Abstract

Purpose

The purpose of this article is to investigate the impact of counterparty risk on the basis risk of industry loss warranties as well as on reinsurance with and without collateral under different dependence structures. The authors additionally compare the solvency and Sharpe ratio for different premium loadings and contract parameters.

Design/methodology/approach

The authors propose a model framework extension to account for the counterparty risk of risk transfer arrangements. Copulas are used to also take into account non-linear dependencies between risk factors, and Monte Carlo simulation is employed to derive numerical results and to conduct sensitivity analyses.

Findings

The authors show that the impact of counterparty risk is particularly pronounced for higher degrees of dependencies and tail dependent losses, i.e. in cases of basis risk levels that appear low if counterparty risk is not considered. With respect to counterparty risk management, the authors find that already partial collateralization limits counterparty and basis risk to more acceptable levels.

Practical implications

The study results are particularly relevant to practitioners, as insurers may not only underestimate the “true” basis risk of index-linked instruments, but also the effect of counterparty risk of reinsurance contracts along with the consequences for solvency and profitability.

Originality/value

The authors extend existing literature by allowing for the (partial) default of industry loss warranties and reinsurance under different dependence structures. Furthermore, the authors include profitability in addition to risk considerations. The interaction effects between counterparty risk and the basis risk of index-based alternative risk transfer instruments are largely unstudied, despite their considerable relevance in practice.

Details

The Journal of Risk Finance, vol. 23 no. 3
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 4 March 2019

Muhammad Fuad Farooqi and John O’Brien

This paper aims to provide a comparative study of the Islamic versus conventional banking sector risk by using market data generated from the sample of publicly listed…

Abstract

Purpose

This paper aims to provide a comparative study of the Islamic versus conventional banking sector risk by using market data generated from the sample of publicly listed Islamic and conventional banks in the Gulf Cooperation Council (GCC) region.

Design/methodology/approach

The authors introduce a market-based measure of bank stress and test this indicator against the Tier 1 Capital Ratio using Granger causality tests.

Findings

The authors find that the market-based measure is a leading indicator of banking stress when compared to the accounting-based Tier 1 ratio and thus is relevant to the Basel regulation’s Pillar 3.

Research limitations/implications

This paper only looks at Islamic vs conventional banks in the Gulf region, and the authors would like to extend this analysis to a broader range of financial institutions, especially in the European and North American markets.

Social implications

Developing a measure that signals bank stress ahead of typically used measures can help regulators, bank management and investors identify oncoming problems and issues before these become too big to manage.

Originality/value

The results from this analysis provides insight into the offsetting impact from two drivers (beta and book-to-market ratio) of the cost of equity capital for the conventional vs Islamic banking sectors.

Details

Journal of Islamic Accounting and Business Research, vol. 10 no. 2
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 5 October 2015

C. Edward Chang, Thomas M. Krueger and H. Doug Witte

For a number of reasons ranging from their more recent introduction to their perceived lesser excitement relative to stock-based peers, there have been few studies of…

Abstract

Purpose

For a number of reasons ranging from their more recent introduction to their perceived lesser excitement relative to stock-based peers, there have been few studies of fixed income (mainly bond) exchange-traded funds (ETFs). The purpose of this paper is to fill the void by comparing performance measures of fixed income ETFs to fixed income closed-end funds (CEFs).

Design/methodology/approach

This paper examines operating characteristics as well as risk and performance measures of all available fixed income ETFs and CEFs in the USA over the last five and ten years ending on December 31, 2014. Operating characteristics include expense ratios, annual turnover rates, tax cost ratios, and tracking error ratios. Performance measures include average annual returns, risks (measured by standard deviations), and risk-adjusted returns (measured by Sharpe ratios and Sortino ratios).

Findings

This study finds material and significant difference in a variety of expenses, return measures, and risk measures. Sharpe and Sortino ratio significance is highly dependent on whether net asset values or market values serve as the dependent variable. ETFs would be the preferred choice of fixed income investors who are presumed to be focussing on market-based return measures.

Originality/value

This paper empirically compares operating characteristics as well as risk and performance measures of US fixed income ETFs and fixed income CEFs in the same Morningstar categories over the last five and ten years.

Details

American Journal of Business, vol. 30 no. 4
Type: Research Article
ISSN: 1935-5181

Keywords

Article
Publication date: 22 September 2021

Mahsa Hosseini, Mohammad Khodaei Valahzaghard and Ali Saeedi

This paper aims to study manipulation and performance persistence in equity mutual funds. To this end, Manipulation-Proof Performance Measure (MPPM) and Doubt Ratio, along…

Abstract

Purpose

This paper aims to study manipulation and performance persistence in equity mutual funds. To this end, Manipulation-Proof Performance Measure (MPPM) and Doubt Ratio, along with a number of current performance measures are used to evaluate the performance of equity mutual funds in Iran.

Design/methodology/approach

The authors investigate performance manipulation by 1) comparing the results of the MPPM with the current performance measures, 2) checking the Doubt Ratio to detect suspicious funds. Additionally, the authors investigate performance persistence by forming and evaluating portfolios of the equity mutual funds at several time horizons.

Findings

The authors conclude that there is no evidence of performance manipulation in the equity mutual funds. Additionally, when comparing the performance of the upper (top) tertile portfolios and the lower tertile portfolios, in all of the studied 1, 3, 6 and 12-month horizons, the authors find performance persistence in the equity mutual funds.

Originality/value

To the best of the authors’ knowledge, this research is the first study to investigate the performance manipulation in the Iranian equity mutual funds, and also is the first study in Iran that uses the MPPM and the Doubt Ratio in addition to a number of current performance measures to investigate the performance persistence in the equity mutual funds at several time horizons.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 15 no. 3
Type: Research Article
ISSN: 1753-8394

Keywords

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