C. Pat Obi and Shomir Sil
The investments industry is made up of two major groups of security analysts: fundamentalists and technicians. Fundamentalists make investment decisions by analysing a company's…
Abstract
The investments industry is made up of two major groups of security analysts: fundamentalists and technicians. Fundamentalists make investment decisions by analysing a company's “fundamentals,” which are risk and performance factors specific to that firm. Technicians, on the other hand, believe that patterns in historical price and volume data for a stock can be used to make profitable trading decisions. In keeping with the latter approach, DeBondt and Thaler (1985, 1987) find evidence of price reversals in three‐year stock returns. Specifically, they determine that stock prices overreact to information, suggesting that a contrarian strategy of buying stocks that performed poorly in the past (i.e. losers) and selling stocks that performed well in the past (i.e. winners), produces significant abnormal returns. Additional support to this “overreaction phenomenon” is documented by Chan (1988), Lo and MacKinlay (1990), and Zarowin (1990).
Dimitrios Tsoukalas and Shomir Sil
Draws together existing research on capital markets to understand how dividend/price ration and dividend growth predict movements in share prices. Analyses data from the UK stock…
Abstract
Draws together existing research on capital markets to understand how dividend/price ration and dividend growth predict movements in share prices. Analyses data from the UK stock market from January 1995 to December 1996 to test out two hypotheses ‐ the first, that there are no significant lag effects from stock price determinants (dividend/price ratio or dividend growth) to real stock returns; the second being the “information hypothesis” of dividends, which predicts that unexpected changes in dividend payments (for example, an increase in dividend payout ratio) may “signal” changes in future returns to investors, thereby leading to higher returns. Points out that this second hypothesis is consistent with the efficient market hypothesis. Analyses the movements in stock returns using Granger causality tests and finds that dividend/price ratio predicts real stock returns for the UK stock market, and that there is a strong relationship between real stock returns and dividend yields. Argues that this is consistent with the “information hypothesis”.
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Pat Obi and Shomir Sil
This study aims to evaluate the market risk exposure of three international equity portfolios using value‐at‐risk (VaR). This risk metric calculates the worst case loss for a…
Abstract
Purpose
This study aims to evaluate the market risk exposure of three international equity portfolios using value‐at‐risk (VaR). This risk metric calculates the worst case loss for a business in the course of its daily transactions. To ensure that the calculated VaR reflects emerging risk characteristics, this paper introduces an approach that incorporates time‐varying volatility.
Design/methodology/approach
This study uses the GARCH technique to calculate the volatility metric with which VaR estimates are obtained. The out‐of‐sample performance of the VaRs is then assessed by comparing them to the actual market risk losses in that period.
Findings
Empirical results show that regardless of market conditions, the VaR calculated with this (GARCH) approach is more robust and more reliable than the traditional methods. Pursuant to the banking regulation on market risk capital stipulated by the Basel Committee on Banking Supervision, the out‐of‐sample VaRs are at least equal to actual daily market risk losses at the 99 percent confidence level.
Practical implications
The key goal of banking regulation is to ensure that financial firms have sufficient capital for the types of risks they take. Determining the right amount of capital requires these firms to first estimate their worst case loss, which is the value‐at‐risk. The approach to the calculation of VaR introduced in this paper enhances the accuracy in the measurement of market risk capital for financial institutions.
Originality/value
This paper recognizes that for VaR to fully account for market risk losses, the risk metric must be correctly measured. The unparalleled approach in this paper of incorporating time‐varying volatility in VaR calculations offers banking institutions a more reliable means of determining their capital adequacy.