Hossein Rad, Rand KY Low, Joëlle Miffre, Robert Faff
Journal of Commodity Markets 28, 100259
Abstract: Our study lies at the intersection of the literature on the diversification benefits of commodity futures and the literature on style integration. It augments the traditional asset mix of investors with a long–short portfolio that integrates the styles that matter to the pricing of commodity futures. Treating the style-integrated portfolio of commodities as part of the strategic mix of investors is found to enhance out-of-sample performance and reduce crash risk compared to the alternatives considered thus far. The conclusion holds across traditional asset mix, portfolio allocation methods, integration strategies, and sub-periods. The diversification benefits of style integration also persist, albeit lower, in a long-only setting.
Norliza C Yahya, Siti SA Gan, Rand KY Low
Environment-Behaviour Proceedings Journal 7 (21), 57-63
Abstract: We examine the sustainable disclosure of IPO proceeds on 423 companies’ survival in the Malaysian market from 2000 to 2014. Using survival analysis, we find that the companies’ survival can be predicted by the proportion of IPO proceeds and their time frame, with debt repayment being the critical driver of companies’ survival. We provide empirical support for securities regulators to include strategic use and timeframe of utilization of IPO proceeds in their information disclosure requirements to protect investors’ interests and improve companies’ post-IPO survival.
Rand Low, Colette Southam, Matthew Winkler
Abstract: In March 2020, Harriet Lee, chief executive officer and co-founder of CoinOrb, was in discussions with her fellow executives. The company needed additional capital to build the MVP (minimum viable product) for their cryptocurrency futures trading platform. A year before, Bitcoin had been valued at US$9,268; it ended 2019 at $3,669, and it was currently trading at $9,668. CoinOrb believed demand would be strong because their proposed exchange would appeal to investors who were hesitant to invest in Bitcoin because of its volatility but were interested in trading Bitcoin futures. Rather than raise additional equity, the CoinOrb founders created an initial coin offering (ICO), a token sale that blockchain start-ups used to raise funds. CoinOrb planned to launch their ICO shortly after launching their platform in late 2020, but they first needed to prepare their white paper. To do this, they would have to determine how to market their ICO to investors, the terms of the ICO, and what value to assign to the tokens.
Siti SA Gan, Norliza C Yahya, Rand KY Low
Abstract: IPO information disclosures such as the strategic uses of IPO proceeds and the time frame to utilize them have the potential to signal the listing companies’ post-IPO survival. We examine the role of the IPO proceeds on 423 companies’ survival in the Malaysian market from 2000 to 2014. Using survival analysis, we find that 47% of companies in our sample facing difficulties in surviving upon the seventh year of listing, with a median survival time of 101 months. Our results show that the companies’ survival can be predicted by the proportion of IPO proceeds and their time frame, with debt repayment being the critical driver of companies’ survival. Higher intended use of IPO proceeds for growth opportunities and debt repayment lead to shorter survival, while a longer time frame to repay debt leads to longer post-IPO survival. Our findings provide empirical support for securities regulators to include both strategic use and timeframe of utilization of IPO proceeds in their information disclosure requirements to protect investors’ interests and improve companies’ post-IPO survival in an emerging markets setting.
Hossein Rad, Rand KY Low, Joëlle Miffre, Robert W Faff
Abstract: The paper uses linear and nonlinear predictive models to study the linkage between a set of 128 macroeconomic and financial predictors and the risk premium of commodity futures contracts. The linear models use shrinkage methods based on naive averaging or principal components. The nonlinear models use feedforward deep neural networks (DNN) either as stand-alone or in conjunction with a long short-term memory network (LSTM). Out of the four specifications considered, the LSTM-DNN architecture best captures the risk premium, which underscores the need to estimate models that are both nonlinear and recurrent. The superior performance of the LSTM-DNN portfolio persists after accounting for transaction costs or illiquidity and is unrelated to previously-documented commodity risk factors.
Lachlan Michalski, Rand KY Low
Abstract: We examine the inclusion of ESG variables, with commonly used financial variables into multi-class corporate credit rating prediction. Using random forests and extremely randomized trees, with mean decrease impurity, mean decrease accuracy and SHapley Additive exPlanations feature importance methods, prediction accuracy is consistent across methods for US and global firms. Environmental and social variables exhibit broad importance across US and global samples, particularly environment pillar score, environmental innovation score, resource use score, emissions score, and CSR strategy score. ESG variables become more pronounced following the financial crisis of 2007-2008, and are important across investment-grade and speculative-grade classes.
Hossein Rad, Rand KY Low, Joëlle Miffre, Robert Faff
Journal of Empirical Finance 58, 164-180
Abstract: The commodity pricing literature advocates the design of long-short portfolios based on equal weights. Relaxing the assumption of naive diversification, this article studies the benefits of applying sophisticated weighting schemes to the construction of long-short momentum and term structure portfolios. Weighting schemes based on risk minimization and risk timing are found to dominate the naive allocation and the weighting schemes based on utility maximization. This conclusion is not challenged by concerns pertaining to transaction costs, illiquidity, data mining, sub-periods, and model parameters and robustly persists when we consider as sorting signals hedging pressure, speculative pressure and, to a lower extent, basis-momentum.
Rand KY Low, Terry Marsh
Journal of Investing 29 (1), 18-30
Abstract: A reduction in cost of traditional financial intermediation was one of the main motivations cited by Satoshi Nakamoto in a 2008 proposal for “… an electronic payment system based on cryptographic proof instead of trust.” We begin here with some back-of-the-envelope calculations of these potential cost savings and benefits from the customer perspective. We then discuss the public blockchain ledger and various solutions to two important problems that are constraints on the public blockchain’s trustless consensus, viz. “mining” costs in proof-of-work and governance issues. We speculate that foreseeable institutional implementations will often involve integration of permissioned blockchains with public blockchains. We then discuss exchanges for trading cryptocurrencies, the second component of the crypto blockchains, and in particular their “teething problems,” along with the evolution of a subset of them into increasingly “industrial strength” entities. We suggest that with a more industrial strength infrastructure in place, self-executing smart contracts are virtually natural counterparts for more traditional passive investment products. We end with a discussion of Security Token Offerings (STOs) and the newer Initial Coin Offerings (ICOs): STOs are an interesting hybrid between the ICOs and traditional IPOs; they could conceivably pave the way to a long-time-coming “direct electronic IPO” market.
Timothy Low, Rand KY Low, Jamie Alcock, Robert Faff and Timothy Brailsford
Abstract: In the context of managing downside correlations, we examine the use of multi-dimensional elliptical and asymmetric copula models to forecast returns for portfolios with 3–12 constituents. Our analysis assumes that investors have no short-sales constraints and a utility function characterized by the minimization of Conditional Value-at-Risk (CVaR). We examine the efficient frontiers produced by each model and focus on comparing two methods for incorporating scalable asymmetric dependence structures across asset returns using the Archimedean Clayton copula in an out-of-sample, long-run multi-period setting. For portfolios of higher dimensions, we find that modeling asymmetries within the marginals and the dependence structure with the Clayton canonical vine copula (CVC) consistently produces the highest-ranked outcomes across a range of statistical and economic metrics when compared to other models incorporating elliptical or symmetric dependence structures. Accordingly, we conclude that CVC copulas are ‘worth it’ when managing larger portfolios.
