Chapter One Introduction - Free Essay Example

Sample details Pages: 6 Words: 1691 Downloads: 4 Date added: 2017/06/26 Category Statistics Essay Did you like this example? 1.1 Aim of Chapter This chapter aims to give an overview of the dissertation. To start with, general backgrounds concerning the efficient market hypothesis (EMH), behavioral finance and market anomalies are mentioned briefly in order to provide better understanding about the modern area of financial study. Then, two opposed concepts of investment strategies, Contrarian Strategies and Momentum Strategies, are addressed leading to the next section which mention the main purpose and summary of findings of this research. Lastly, the structure of the dissertation has been outlined at the end of the chapter. Don’t waste time! Our writers will create an original "Chapter One: Introduction" essay for you Create order 1.2 Background of knowledge about efficient market hypothesis (EMH) The theory of market hypothesis (EMH) is one of the most crucial theories in standard finance that have been revised and tested over the past few decades to uncover its imperfection. This theory was introduced by Professor Eugene Fama in 1970. As defined in his article, the efficient market is the market where securities are priced, at any point of time, by accessible information. It is believed that the markets are extremely efficient that individual stocks and stock markets as a whole are fully reflected by all available information. When new information enters the market, stock prices incorporates the news and responds very quickly with our any delays; therefore security prices are the accurate source of data which can be used as signals in trading investment process. By examining the level of how relevant information reflects in security prices, Fama (1970) categorizes the market efficiency into three forms: weak, semi-strong and strong forms of EMH. However, this theory relies o n certain assumptions, for example, there is no transaction cost paid in trading securities and it is costless for all participants to gather information available in the markets. The weak form of EMH is the condition that exists when share prices are fully reflected by trading data such as past price (or return) histories. For that reason, investors cannot exploit mispriced securities and earn excess returns by using historical stock quotations or charts. Semi-strong form of EMH is the condition that exists when share prices incorporates market trading data and publicly available information. The examples of this type of information are announcements of annual earnings, stock splits, annual reports, analyst forecasts, etc. As a consequence, investors cannot exhibit gains by rely only on fundamental and macro-economics data. Strong form of EMH is the condition that exists when market prices of stocks adjusted according to every kind of accessible information. This includes hidden inside information which are known among specific group in the company (e.g. the top executives and group of operational managers) or some individuals that have monopolistic access to information (e.g. managements of mutual funds). Thus, abnormal profits cannot be generated by either using internal or external information of the company. In other words, both individual and professional investors cannot beat the market and earn excess returns in every way due to the perfect efficiency of the stock markets. As claimed by efficient market hypothesis, market will be efficient in weak form if the past and future returns are not correlated, in other words, they are independently and identically distributed. Thus this refers to the idea of the random walk model. However, Fama (1970) affirms in his literature that the test of random walk model leads to the evidence of weak-form EMH, but not vice versa. Burton (2003) identifies the definition of à ¢Ã¢â€š ¬Ã…“random walkà ¢Ã¢â€š ¬? in his paper that it is the state where the flow of information on specific day is incorporated in stock prices on that day only, not for the subsequent period. The news announced in the market is unpredictable, thus stock prices changes are displayed in a random pattern. As a consequence, uninformed investors are able to earn equal rate of returns as what achieved by professional investors if they long position in well-diversified portfolios. In his paper, Burton tries to examine the criticism of the efficient market hypothesis and the idea that stock prices can be predicted based on initial valuation parameters (e.g. price-earnings multiple or dividend yield). He uses time-series analyses of accounting numbers and multiples and comes up with the results revealing that the stocks market are efficient enough, but it is difficult to predict the share prices. Moreover, the findings also reveal that anoma lous behavior of stock prices may exist, but investors cannot create portfolio trading opportunity and gains excess risk adjusted returns. Fama (1997) states in his study that there are many literatures concerning behavioral finance and market anomalies challenge the hypothesis of efficient market. The opposed idea suggests that stock prices slowly absorb information available, which can be denoted as the market inefficiency. 1.3 Behavioral Finance and Market Anomalies Behavioral finance is the new area of financial study concentrating on the psychology of market and its participants. This field of study has started to appear in many academic journals from 1990s. Shefrin (2002) publish a book regarding the behavioral finance trying to find and explain reason behind the behavior of investors, both professional and individual. The author suggests that investors, who are sometimes prone to commend mistakes and errors, tend to rely on their emotional and psychological forces, thus this causes many market anomalies, the state where there is inefficiency in stock markets, to take place. Two well-known papers of Berberis, Shleifer, and Vishny (1998) and Daniel, Hirshleifer, and Subramanyam (1997) proposed behavioral models to explain the conflicting theory of efficient market hypothesis. They reject the previous belief with the proposition that the behavioral biases (i.e. judgment bias) of investors cause the anomalies and knock down the old theory behind. They present the concepts of over-reaction and under-reaction which accommodates the existence of long-term excess returns. Berberis, Shleifer, and Vishny (1996) create a model based on cognitive psychology of two judgment biases: the representativeness bias and conservatism. In their study, the empirical findings of investorsà ¢Ã¢â€š ¬Ã¢â€ž ¢ behaviors are divided into two main groups: one perceives that earnings are mean-reverting. Thus, stock prices show a delayed short-term response and under-react to change in earnings. Another group believes that firmsà ¢Ã¢â€š ¬Ã¢â€ž ¢ earnings are trending which leads to the overreaction in stock prices. The earnings follow the random walk process; hence, this leads to reversal of long-term returns. Daniel, Hirshleifer, and Subramanyam (1997) have different views in conducting the behavioral models. They split the sample group of investors into two categories: informed and uninformed investors. They find that judgment biases are not found among the uninformed investors, but detected among the informed ones. Informed investors are the group of people that determine the stock prices. They are exposed to two kinds of behavioral biases: overconfidence and self-attribution biases. Overconfidence causes the overstatement in investorsà ¢Ã¢â€š ¬Ã¢â€ž ¢ perception of their private stock prices signals, while self-attribution bias causes investors to underweight the public signals about the value of companies. Therefore, the circumstance of overreaction to private information and under-reaction to public information generates continuation of stock returns in the short run. Overreaction leads to the concept of contrarian investing, whereas underreaction induces the theory of momentum inve sting. 1.4 Investment Strategies 1.4.1 Contrarian Investing Contrarian investing is the strategy that aims to generate profits by investing in the direction that goes against the conventional investors. In normal condition, short-sighted investors, who overweight the recent trends of past stocks prices and use this information to predict future prices, engage in buying stocks with good performance in the past hoping that it will continue to perform well in the near future. However, contrarian investing focuses on the opposite direction. People who employ this strategy tend to buy the shares that others have given up on due to either their poor past performance or their miserable and unclear future prospect. They expect the market to react to the behavior of the crowd, so that they can exploit the mispricing of securities and earn abnormal returns. 1.4.2 Momentum Investing Momentum investing is the strategy that is the opposite of contrarian investing. People who employ this strategy seek for making profits by relying on the continuance of the past stock prices and trends in the market in an attempt to predict prospective prices in the future. It is believed that the good stocks with price increases and strong performance in the past will keep on outperforming and generate gains in the future, and vice versa for the poor stocks. Thus, momentum investing suggests investors to hold stocks that had high returns and sell those that had low returns (buy winners and sell losers). The detailed of these two investment strategies will be discussed in the next chapter which both strategies will be supported by existing empirical evidences from several renowned academic papers. 1.5 Purpose and Findings of the Research The purpose of this research is to examine the profitability of momentum strategies, which is one of the most debated investment strategies in financial study, in the UK stock market. This paper employs the prices and returns data of FTSE 100 composites à ¢Ã¢â€š ¬Ã¢â‚¬Å" the top 100 biggest companies in London Stock Exchange à ¢Ã¢â€š ¬Ã¢â‚¬Å" as a proxy of the whole UK stocks. The observation period lies between July 21, 2000 to July 21, 2010, which gives a total of 10 years period. Thus, the main contribution of this study is to comprehensively revise existing literatures and employ the more up-to-date the data set with the well-known procedure to test the existence of momentum investing and its profitability in the UK market. However, the findings reveal no evidence of momentum profitability in the observed time for UK stock market, which are inconsistent with the prior research conducted using the different sample periods. 1.6 Structure of the Dissertation The rest of the dissertation is organized as follows: Chapter two comments on the review of the literature regarding the momentum strategies and its criticism, including the opposed theory of contrarian investing. Academic papers concerning the momentum strategies are divided into categories regarding the region of data employed. We carefully asserted and analyzed each paper to find the gaps which are necessary to be concerned for further researches in the future. Then, chapter three gives an overview of data and methodology used in this research. Chapter four shows the summary statistics of data, empirical results and interpretations. Finally, last chapter provides a summary of the results, as well as the limitations of the study.

Iraq Essay - 1738 Words

Three is Better than One Car bombs, army raids in the middle of the night, executions and mass graves. These are only a few of the atrocities that are the result of war. Most people in the world do not know what it is like to live through a civil war, but many kids and families in the country of Iraq know nothing else. Since 1918 Iraq has been in a civil war. You may be asking â€Å"how could a conflict endure for this long?†. The answer to that question is that the three general groups that Iraq is composed of remain in constant conflict. The Kurds, Sunnis and Shiites have never and will never get along. The Iraqi government uses its power to attack towns and villages of what they determine to be the â€Å"outgroups†. The ousting of Saddam Hussein†¦show more content†¦They consist of the different ethnic groups of Kurds, Turks, Assyrians and Arabs. These ethnic groups are divided into the religious groups of Shiite Muslims, Sunni Muslims, and Christians. Relations between these group s have never been ideal. The three separate geographical are made from the occupation of Kurds, Sunnis and Shiites. Kurds, Sunnis and Shiites have had violent relations for decades. Power abuse in the government has occurred with leaders from different sects. One of the main examples of this became evident with the dictator Saddam Hussein. He was a Sunni Muslim who used the chemical weapon wielding Iraqi army to commit humanitarian crimes against the other religious groups in the country. President Bush described Saddam Hussein as â€Å"‘a brutal dictator’† that â€Å"‘should not be permitted to dominate a vital region and threaten the United States ‘† (qtd. in Perry 2). Iraq is a rich oil region that is essential to U.S. industry. President Bush made it very clear that U.S involvement is necessary in order to â€Å"protect U.S. national security and promote world peace† (Perry 2). In March of 2003, according to Jamsheed Choksy, the c hairmen of the Department of Central Eurasian Studies at Indiana University, a U.S. led coalition ousted the Sunni dictator in â€Å"Operation Iraqi Freedom† (Department of Defense). Corrupt government leaders are not the only complication within the country, it is unfortunately alsoShow MoreRelatedIraq Essay1023 Words   |  5 Pages The Republic of Iraq is a country that has gone through extreme damages due to multiple wars causing a lot of harm to its people, wildlife, and the environment. It is a country governed by democracy and is rich in history as it became independent from Britain and Saddam Husseins Baath Party. Air Defense Artillery was able to show its capabilities when they intercepted a tactical ballistic missile that was launched from Iraq during Operation Iraqi Freedom in 2013. Because of this event, KuwaitRead MoreIraq Essay768 Words   |  4 PagesIraq, is officially named â€Å"The Republic of Iraq†. 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Superannuation Retirement Schemes Time Value of Money - Sample

Question: Discuss about the Superannuation Retirement Schemes for Time Value of Money. Answer: Introduction This report is based on a companys case study named UniSuper Ltd. This company provides various superannuation retirement schemes for its employees which are distinguished in nature. Two of the most prominent schemes are Defined Benefit Plan (DB) and Investment Choice Plan (IC), also known as Defined Contribution Plan. Such schemes have gained importance in previous years because these investments are aimed at securing ones future and non- working part of their life. The report is based on identifying factors that affect an employees decision to choose a particular scheme and the impact of these factors in selecting the amount of contribution to such schemes. For this context, Defined Benefit Plan and Investment Choice Plan are discussed in detail. The most important factor to be considered while choosing any one of them is the time value of money. It will also be discussed that how will time value of money influence decision- making process of employees. The potential returns or retirement savings that are derived from these schemes are of utmost importance. Some researchers have also argued that the time value of money concept render Defined Benefit Plan ineffective when compared to investment returns from other schemes. This will be discussed further. The underlying case study of the company, UniSuper Ltd. suggests some retirement plans for its employees which will be discussed. The report also consists of ascertaining the most preferable retirement plan for an employee (Jefferson Preston, 2005). Factors Affecting Superannuation Contributions Generally, employees save some part of their salary to be used for their retirement. Superannuation is one of the ways for employees by which they can fulfil this purpose. In such schemes, employer contributes some percentage of employees salary to the fund and the rest is deducted from employees gross salary. Sometimes, there is a contribution from government authorities as well. How much an employer, employee or third party (government) will contribute depends on various factors. Few of which are discussed below. These factors also depict which scheme an employee is likely to choose. Regulations by government In Australia and even in other countries, there are regulations by government which compel employers to contribute a minimal amount to employees superannuation funds. Research studies in Australia show that people working there tend to have a greater life expectancy than before. In addition, they are inclined to retire at an earlier age. This implies that there is a critical need for them to manage super funds for their retirement. Currently, the rate is 9% of the employees salary which is to be contributed by the employer compulsorily. However, few small- scaled employers are exempted from this regulation (Worthington, 2008). Age of employees It has been studied that older people tend to contribute more to such funds as they have relatively higher saving instinct. Reason may be that young people are more reluctant to save, instead they believe in spending. However, elderly people have a more mature thought process which asks them to save for comfortable and luxurious future (Hurnard, 2005). Income groups Another factor affecting superannuation contributions is the income group in which employees fall. An employee from low income group is likely to contribute a little amount to super funds because he has other obligations to fulfil. And, with his low income, he can satisfy only the most urgent ones. On the other hand, a high- income group is likely to contribute a greater share to super funds (Drew Stanford, 2003). Risk appetite If the employees risk appetite is high, he/ she will invest Investment Choice Plan and vice versa (Brown et al., 2004). Time value of money considerations When time value of money is considered, Defined benefit Plan is likely to lose value in future, which is discussed below (St John, 2009). Definite Benefit Plan (DB) These plans are sometimes called as qualified pension plans. It is one of the most common retirement plans. A major part of such funds is contributed by the employer. In such a scheme, amount to be contributed by employer and final amount credit to the employee is calculated using some mathematical formula. The formula goes as follows. Retirement benefit = benefit from salary * term of employment * lump- sum factor * average service fraction. The name of this scheme includes the word defined because the way to calculate employers contribution is known well in advance. There are some regulations even for the time and amount of withdrawal by employee. These schemes also provide a tax benefit to the employee (Scott, 1994). Investment Choice Plan (IC) Investment choice plan is another scheme for employees to save for their future and retirement. Like any other superannuation scheme, there is an employer- employee contribution in this scheme as well. However, computations are a bit different. The funds are invested in various financial assets. Employees have a facility to choose type of financial asset in which their fund can be invested based on their risk appetite and return required. The retirement benefits of employees comprise of the gains of their funds which are invested in various financial instruments after deducting any administration or management overheads. The company under study provides four options for employees. First are secure funds in which funds are invested in fixed income bonds of Australia. These are least risky, but provide low returns. Secondly, they have stable funds mostly invested in fixed income securities but also spare some part for equity shares. Trustees selection fund is another type in which inve stment in both risky and secure assets is balanced. The highest return giving, but the most risky fund is share fund with a large exposure to equity market (Poterba et al., 2007). Time value of money- The concept Time value of money illustrates the financial impact on money value that gradually deteriorates due to inflation and other economic factors like interest rates. It is also known as discounted value of money. The amount of money that one is having today will not have the same value after five years. It is illustrated by an example. I have AUD 210 and I have to buy 15 CDs worth AUD 14 each. After five years, the price of a CD rises to AUD 15 from AUD 14. Now I will be able to buy only 14 CDs with the same amount of AUD 210. This means that value of AUD 210 has depreciated with time. This is the time value of money (Halperin, 1996). Issues affecting decision- making process in context of time value of money The time value of money concept significantly affects the decision- making process of employees when they choose which policy or scheme would be better for their retirement. If an employee chooses Defined Benefit Plan, then he/ she might forego some value of their money in future. We have already discussed that due to time value of money concept, the value of money degrades in future to a certain amount due to inflation and interest rate forgone, had they invested money in some banking product. So, the amount that employer contributes to the super fund of Defined Benefit plan is devalued in future and employee ends up with lesser amount. Besides that, in Investment Choice Plan, the employee will receive money adjusted to time value because returns from various investments will be adjusted according to inflation and interest rate movements of the market, i.e. real returns will be there. Hence, this factor is keenly considered before making a decision on which scheme to choose. So, time value of money affects the choice of employees regarding retirement schemes. This study shows that Investment Choice Plan is better to invest. But not all employees invest in this scheme. The reason is risk factor and certainty factor. IC plan inhibits a greater risk and is not suitable for a risk-averse person. Secondly, returns in IC plan are not stable enough. Sometimes you get a high amount and at other times, a lesser amount is earned. This uncertainty makes employees reluctant to invest in IC Plan (Vidler, 2004). Potential investment returns and retirement savings Potential investment returns, in context of Investment Choice Plan are the returns that can be earned from the pool of investments a fund has undertaken. It depends on the risk appetite of an individual and type of assets he/ she has invested in. Whereas in context of defined benefit Plan, retirement savings is the appropriate term since it simply saves a part of salary to be used in future. However, studies show that DB plan gives more consistent returns and even higher returns than IC plans. Reason being IC plans is subjected to market risk. This affects the overall average return earned by them (Munnell et al., 2015). Impact of time value of money on investment returns of Defined Benefit Plan (DB) Before we check the impact on any particular scheme, present- future value considerations should be understood in general. In context of our case study, if an employer promises today a retirement benefit worth AUD 200 to be paid for next 15 years of service, then we can say that future value of payment is AUD 200*15, which is AUD 3000. But in time value of money concept, the future value can be calculated as Future value * (1-(1/ 1+interest rate) ^ no. of years)/ interest rate. The present value in this case is AUD 2074, instead of 3000. This shows that employee will get less in real terms, if he chose to invest in Defined Benefit Plan. Hence, we can say that a person investing in such a scheme will forego potential investment returns that could be earned while investing in some other scheme (Hariga, 1995). Retirement investment products at UniSuper Ltd. Besides two major retirement schemes discussed above- DB plan and IC plan, the company UniSuper Ltd. provides a wide range of retirement and pension plans. We have already discussed the range of IC plans in which an employee can invest his fund according to the amount of risk exposure he wants (Disney Johnson, 2001). Apart from that, there are many pension plans well. Few of which are discussed below. Index- linked pension plans: In these plans, returns are related to some inflation index to provide real returns to employees. And, if employee dies, the fund is transferred to his dependants. Single life index- linked plans: It is same as above, but it is for employee only. The amount is not transferred to dependants (Bodie, 1989). Allocated pension funds: These schemes allow an employee to withdraw the amount before retirement, if they have some urgent need. Roll- over pension funds: These funds give the facility to change the type of fund they have invested in, if they want so in future (Choi et al., 2002). The most attractive investment plan based on risk/ return and time value of money The attractiveness of a retirement plan depends on an individuals risk appetite. Besides that, time value of money is another important concept to be considered to ascertain the relative attractiveness of the plans. Based on time value of money, the most attractive plan is IC plan. It is substantiated by an example. An employer contributes AUD 100 for next 5 years to the employees super fund of Defined Benefit Plan. The interest rate foregone is say 5%. So, in future, employee will get AUD 500. But according to time value of money, actual future value of the fund should be as follows. An annuity of equal payments of AUD 100 for 5 years with interest rate of 5% will have a future value calculated as future value= amount * (((1+interest rate) ^ no. of years) 1)/ interest rate. This gives future value of AUD 552.56. But employee will receive only AUD 500. However, this opportunity cost will not be incurred in IC plan because they provide real returns (adjusted for inflation) based on market performance. Based on risk appetite, following plans will be attractive for different class of people. Employee group Type of retirement plan or scheme Highly risk- averse Secure funds Risk- averse Stable funds Risk- neutral Trustees selection funds Risk- loving Share funds Real returns required having dependants Indexed- pension funds No dependants but require real returns Single- life indexed pension funds Require money before retirement Allocated pension funds Want to change the type of scheme later Roll- over pension funds (Blake, 2000) References Blake, D., 2000. Does it matter what type of pension scheme you have? The Economic Journal, 110(461), pp.46-81. Blake, D., Cairns, A.J. Dowd, K., 2006. Living with mortality: Longevity bonds and other mortality-linked securities. British Actuarial Journal, 12(1), pp.153-97. Bodie, Z., 1989. Pensions as retirement income insurance. Brown, K., Gallery, G., Gallery, N. Guest, R., 2004. Employees' choice of superannuation plan: Effects of risk transfer costs.T. The Journal of Industrial Relations, 46(1), pp.1-20. Choi, J.J., Laibson, D., Madrian, B.C. Metrick, A., 2002. Defined contribution pensions: Plan rules, participant choices, and the path of least resistance. Tax Policy and the Economy, pp.67-114. Disney, R. Johnson, P., 2001. Pension systems and retirement incomes across OECD countries. Edward Elgar Publishing. Drew, M.E. Stanford, J.D., 2003. 322 A review Of Australia's compulsory superannuation scheme after a decade. Halperin, D.I., 1996. Interest in Disguise: Taxing the" Time Value of Money. The Yale Law Journal, 95(3), pp.506-52. Hariga, M.A., 1995. Effects of inflation and time-value of money on an inventory model with time-dependent demand rate and shortages. European Journal of Operational Research, 81(3), pp.512-20. Hurnard, R., 2005. The effect of New Zealand Superannuation eligibility age on the labour force participation of older people. New Zealand Treasury., 5(9). Jefferson, T. Preston, A., 2005. Australia's other gender wage gap: Baby boomers and compulsory superannuation accounts. Feminist Economics, 11(2), pp.79-101. Munnell, A.H., Aubry, J.-P. Crawford, C.V., 2015. 15-21 Investment Returns: Defined Benefit Vs. Defined Contribution Plans. Boston College. Poterba, J., Rauh, J., Venti, S. Wise, D., 2007. Defined contribution plans, defined benefit plans, and the accumulation of retirement wealth. Journal of Public Economics, 91(10), pp. 2062-2086. Scott, T.W., 1994. Incentives and disincentives for financial disclosure: Voluntary disclosure of defined benefit pension plan information by Canadian firms. Accounting Review, pp.26-43. St John, S., 2009. The annuities market in New Zealand. Wellington: Ministry of Economic Development, For the Capital Markets Taskforce Report. Vidler, S., 2004. Superannuation: choice, competition and administration cost. Journal of Australian Political Economy, 53, p.27. Worthington, A.C., 2008. Knowledge and perceptions of superannuation in Australia. Journal of Consumer Policy, 31(3), pp.349-68.