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This paper specifies a simulated convertible bond arbitrage portfolio to characterise the risks in convertible bond arbitrage. For comparison the risk profile of convertible bond arbitrage hedge fund indices at both monthly and daily frequencies is also examined. Results indicate that convertible bond arbitrage is positively related to default and term structure risk factors. These risk factors are augmented with the simulated convertible bond arbitrage portfolio, mimicking a passive investment in convertible bond arbitrage, to assess the risk and return of individual hedge funds. We provide estimates of the performance of two hedge fund indices (an equally weighted and value weighted index) and a sample of convertible bond arbitrage hedge funds using a factor model methodology. Lagged and contemporaneous observations of the risk factors are specified, controlling for illiquidity in the securities held by funds. Our results cover two time periods. Initially we find evidence of abnormal risk adjusted returns in the individual hedge fund data and the equally weighted hedge fund index and no evidence of abnormal risk adjusted returns in the value weighted hedge fund index. When we examine performance during the credit crisis of 2007 and 2008 we find evidence of negative abnormal returns amongst individual hedge funds and the hedge fund indices.

Recent academic and practitioner attention has focused on currency momentum. In this paper we replicate technical trading rules to assess their relationship with momentum. We find the effectiveness of technical trading rules falls significantly over time, with the mean Sharpe Ratio of our sample of portfolios falling from 0.66 in our in-sample period to 0.06 out-of-sample. Further, the returns do not survive modest transaction costs out-of-sample. We identify time series momentum as the single common factor driving returns across the range of strategies. Any abnormal return generated by technical trading rules is fully explained by time series momentum.

We show that carry, momentum and value predictability in currencies is associated with mispricing. Specifically, investment performance disappears subsequent to published evidence showing portfolio returns are not fully explained by risk. Replicating these studies, we show that the average out-of-sample Sharpe ratio decreases from +0.39 to −0.32. Cross sectional tests show that currencies no longer respond to interest rate and real exchange rate differentials. During this period currency excess returns do not exhibit autocorrelation. Our results are consistent with investors learning about mispricing from academic research.

Using an entirely new dataset of audited filings from firms that manage hedge funds, this study examines whether the hedge fund compensation contract aligns managerial incentives and investor interests. Our novel dataset allows us to distinguish between firms focused exclusively on hedge fund management and diversified firms offering products in addition to hedge funds. Our results for compensation data of hedge fund only management firms confirm that compensation increases as assets under management increase, despite increased costs and performance diseconomies of scale. Hedge funds managed by diversified firms have significantly lower performance. A relatively small proportion of the compensation from these firms is generated from hedge funds. The results are consistent with diversified hedge fund firms having weaker alignment between managerial incentives and investment performance.

Prior research in hedge fund and mutual fund management finds a positive relation between portfolio distinctiveness and subsequent performance, suggesting that strategy differentiation is associated with superior skill. We find that commodity trading advisors (CTAs) with returns that correlate more strongly with those of peers feature higher performance and are more highly exposed to a time series momentum factor. Strategy conformity appears to be a signal of managerial skill in CTAs, in contrast to hedge funds and mutual funds. These results indicate that a common trend following strategy drives CTA returns and that CTAs offer investors an opportunity to invest in momentum.

We show that fund-specific return skewness is associated with managerial skill and future hedge fund performance. Specifically, skewness in fund returns reflects managerial skill in avoiding large drawdowns. Using a new measure of investment skill that accounts for this managerial ability, we demonstrate that traditional performance measures under-estimate (over-estimate) managerial performance when returns exhibit positive (negative) fund-specific skewness. Our new measure is particularly valuable during periods of economic crisis, when the annual risk-adjusted out-performance is 5.5%.

Regulatory reporting across multiple jurisdictions is a significant cost for financial services organizations, due to a lack of systems integration (often with legacy systems) and no agreed industry data standards. This article describes the design and development of a novel ontology-based framework to illustrate how ontologies can interface with distributed data sources. The framework is then tested using a survey instrument and an integrated research model of user satisfaction and technology acceptance. A description is provided of extensions to an industry standard ontology, specifically the Financial Industry Business Ontology (FIBO), towards enabling greater data interchange. Our results reveal a significant reduction in manual processes, increase in data quality, and improved data aggregation by employing the framework. The research model reveals the range of factors that drive acceptance of the framework. Additional interview evidence reveals that the ontological framework also allows organizations to react to regulatory changes with much-improved timeframes and provides opportunities to test for data quality.

The attention-grabbing hypothesis has been offered as a behavioural explanation for post-event abnormal returns for FDA drug approval announcements for NYSE listed firms. We show that when event-day mis-specification is accounted for, the market reaction is centred on the event-day and that the increase in firm value is driven by after-market-close approval announcements.

Based on the Qur ' anic prohibition against interest ( riba ), this paper quantifies the true cost of purification for the first time. The extant literature focuses on the performance of various Islamic portfolios but the returns of these funds are pre-purification. This is a significant oversight given that, for some scholars, the entire permissibility of the industry rests on purification. By comparing the impact on returns of three purification methodologies we show that purification adversely and statistically significantly impacts portfolio returns and that the choice of purification methodology also matters. Our results are robust to alternative portfolio construction methodologies and standardised tax rates. The implications are that purification is not a trivial matter for compliant Muslim investors — comprehensive shari'ah compliance has a significant faith and financial implications for compliant Muslim investors such that it could be argued that, by ignoring the impact of purification on returns, the findings of the extant literature are incomplete.

In this paper, we provide the first comprehensive UK evidence on the profitability of the pairs trading strategy. Evidence suggests that the strategy performs well in crisis periods, so we control for both risk and liquidity to assess performance. To evaluate the effect of market frictions on the strategy, we use several estimates of transaction costs. We also present evidence on the performance of the strategy in different economic and market states. Our results show that pairs trading portfolios typically have little exposure to known equity risk factors such as market, size, value, momentum and reversal. However, a model controlling for risk and liquidity explains a far larger proportion of returns. Incorporating different assumptions about bid-ask spreads leads to reductions in performance estimates. When we allow for time-varying risk exposures, conditioned on the contemporaneous equity market return, risk-adjusted returns are generally not significantly different from zero.

This paper models the returns of the convertible arbitrage hedge fund strategy using a non-linear framework. Investors in the CA strategy have experienced long periods of persistent positive returns accompanied by low volatility, followed by shorter periods of extreme negative returns and high volatility, associated with periods of broad market upheaval. The smooth transition regression (STR) model specified in this study is particularly appropriate for assessing the performance of a strategy of this nature, as it allows for smooth transition between risk regimes. We find that in the alternate regimes the strategy exhibits relatively high (low) exposure to risk factors and alpha is high (low). We suggest that evidence reported in this paper accounts for abnormal returns reported for the strategy in previous studies.

Whistleblowing involves employees reporting upon wrongdoing occurring in their organisation. Traditional views of whistleblowing (a disloyal act) are evolving towards a more modern view (sympathetic). This study evaluates attitudes towards whistleblowing in Ireland. Corporate employees reviewed business scenarios, evaluated whether they were prepared to become whistleblowers or not and gave their reasons. They also evaluated their organisation’s attitude towards whistleblowing. The findings suggest many employees (particularly males) are still reluctant to report wrongdoings in their workplace and would rather report internally than externally. Also, employees who do whistle-blow are motivated more by feelings of loyalty than self-interest. Finally employees do not consider their organization particularly supportive of whistleblowing. Results suggest organisations must do more to promote whistleblowing if employees are to be encouraged to do so appropriately.

PurposeThe research aims to test whether the ability to measure marketing performance affects the actual performance of firms, in the context of the European high‐tech sector. It also aims to test whether performance‐reporting frequency and size of marketing budget mediate the relationship between measurement ability and performance.Design/methodology/approachSurvey responses collected from 157 marketers were supplemented with firm performance data.FindingsResults show that marketing performance measurement ability positively impacts firm performance and that reporting frequency mediates this relationship.Research limitations/implicationsMore attention should be given to the activities that are measured rather than the metrics in use – which receive much attention in the literature. Current interest in marketing dashboards may be overstated.Practical implicationsEnhanced ability to account for marketing leads not only to improved firm performance, but also to greater regard for marketing at the senior management level.Originality/valueThis is the first study to demonstrate a link between marketing performance measurement ability or frequency and firm performance in the European market. It also provides an insight into the chain of effects linking marketing performance measurement ability to firm performance.

The recent growth in interest in convertible bond arbitrage (CBA) has come predominately from the hedge fund industry. Past empirical evidence has shown that a CBA strategy generates positive monthly abnormal risk adjusted returns. However, these studies have focused on hedge fund returns which exhibit instant history bias, selection bias, survivorship bias and smoothing. This paper replicates the core underlying CBA strategy to generate an equally weighted and market capitalisation daily CBA return series free of these biases, for the period 1990 through to 2002. These daily series also capture important short-run price dynamics that previous studies have ignored.

We investigate the pricing of systematic liquidity risk in UK equities using a large sample of daily data. Employing four alternative measures of liquidity we first find strong evidence of commonality in liquidity across stocks. We apply asymptotic principal component analysis (PCA) on the sample of stocks to extract market or systematic liquidity factors. Previous research on systematic liquidity risk, estimated using PCA, is focused on the US, which has very different market structures to the UK. Our pricing results indicate that systematic liquidity risk is positively priced in the cross-section of stocks, specifically for the quoted spread liquidity measure. These findings around the pricing of systematic liquidity risk are not affected by the level of individual stock liquidity as a risk characteristic. However, counter-intuitively, we find that the latter is negatively priced in the cross-section of stocks, confirming earlier research.

Using tick data covering a 12 year period including much of the recent financial crisis we provide an unprecedented examination of the relationship between liquidity and stock returns in the UK market. Previous research on liquidity using high frequency data omits the recent financial crisis and is focused on the US, which has a different market structure to the UK. We first construct several microstructure liquidity measures for FTSE All Share stocks, demonstrating that tick data reveal patterns in intra-day liquidity not observable with lower frequency daily data. Our asymptotic principal component analysis captures commonality in liquidity across stocks to construct systematic market liquidity factors. We find that cross-sectional differences in returns exist across portfolios sorted by liquidity risk. These are strongly robust to market, size and value risk. The inclusion of a momentum factor partially explains some of the liquidity premia but they remain statistically significant. However, during the crisis period a long liquidity risk strategy experiences significantly negative alphas.

This study tests a large sample of UK equity returns from 1965 to 2007 for predictability. Returns are tested using the Lo and MacKinlay (1988) variance ratio test and the Chow and Denning (1993) multiple variance ratio tests. Overall, the results show strong signs of predictability. There is a size effect, in which small equities appear more predictable in the first half of the sample (1965– 1985), and mid- to large size equities appear more predictable in the second half of the sample (1986–2007).

This paper replicates the core underlying merger arbitrage strategy using daily data from the United Kingdom to generate three simulated merger arbitrage portfolio return series, for the period 2001 through to 2004. Past empirical evidence indicates that the merger arbitrage strategy generates large risk adjusted returns. More recent evidence indicates that the strategy has a return distribution equivalent to a short put option on a stock index. These prior studies have generally focused on monthly returns in the North American stock markets. For the UK market we find evidence that the merger arbitrage strategy exhibits little systematic risk and generates significant risk adjusted returns. Contrary to prior research we find no evidence of an increase in systematic risk in depreciating equity markets.