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«Equity Style Investing RONG, WU How to cite: Equity Style Investing, Durham theses, Durham University. RONG, WU (2013) Available at Durham E-Theses ...»

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First, it should make sense to extend the sample to the latest available data to test whether the basic findings are still hold. The sample data used in this research is till the end of 2004. Over the past 8 years global financial markets have undergone some fundamental changes.

As major financial markets collapsed during 2007-2008 due to credit crunch, several most influential large investment firms have had their share prices plummet as a result of such subprime bust29. While this

For example, Lehman Brothers reported a loss over $2.8 billion for the second

quarter of 2008. Its stock price had fallen over 62% till 24 June 2008. The global financial service firm eventually has to declare bankruptcy, which was the largest bankruptcy in U.S. history. Other firms like Merrill Lynch reported an $8.6 billion net loss on 17 January 2008, while on 15 January 2008 Citigroup reported a fourth quarter net loss of $9.83 billion, including $18.1 billion in pre-tax write downs on its subprime investment. Similarly, UBS shut down one of its hedge funds in 2007 due to loss of $123 million assets and also reported a $4.4 billion loss on fixed-income securities for the third quarter 2007.

research does not contain stocks in the financial service industry, the collective market behaviour of these global key players arguably would inevitably cause excess volatility of other assets in the stock market and therefore affecting the asset pricing dynamics. By extending the research sample to contain the most recent credit crunch period, one is able to test the sensitivity of the findings and more reliable test results should be yielded. While this research is mainly based on the U.K stock market, it is also interesting to cover other developed markets that have different institutional environment30.

Second, the style investing strategies discussed in this thesis often contains the structure of short selling. In market practice this process involves using of borrowed shares that are often from brokerage firms or institutional investors based on collateral. Short selling introduces costs. D’Avolio (2002) shows that the value-weighted cost to borrow stocks is 0.25% annually. In addition to the short selling cost, there exists general transaction cost in the market trading activity. Chan and Lakonishok (1997) argue that in the NYSE market the average round-trip transaction cost for small-cap and large-cap stocks are 3.31% and 0.90%, respectively. It is argued that academics generally underestimate the impact of such transaction cost in the empirical research (c.f. Sadka (2004), Lesmond et al. (2004), Hanna and Ready (2005)). Indeed, momentum effects are more pronounced in small size stocks with wider bid-ask spread, and such strategy requires frequent rebalancing that results in high turnover. This would suggest that it is important to incorporate the impact of various trading cost in the style investing strategies. Hence it makes sense to explore if the empirical findings still hold once possible trading costs are adjusted.

Third, the optimal style portfolio allocation examined in Chapter 5 is based on the assumption that investors face a single-period case to maximise their mean-variance objective. However the optimal choice Recent study of Chao et al. (2012) examines the equity style momentum strategies in major international markets. However, their work mainly focuses on the testing part, rather to explore the underlying reason for the profitability of such strategies.

based on multi-period is not covered yet. Indeed, instead of the single period case investors may also wish to maximise their utility following a multi-period investment scenario. It makes sense to conduct the study of such multi-period optimal style allocation problem and also compare the results with that derived from the single-period case.

Fourth, Chapter 5 uses the risk-adjusted returns in the study. It will be very interesting to conduct a similar research based on the excess returns to the market index. The optimal style investing based on such excess returns captures the gain from beating an index with low tracking errors and is therefore equivalent to an ‘active indexation’ strategy, and the optimal weights can be interpreted as ‘active weights’.

Since market index also exposes to the business cycle effect, it is interesting to compare if the underlying optimal style policy would change given the two research schemes. Additionally, in response to the concerns that Markowitz optimal framework often yields extreme long-short weights (c.f. Best and Graner (1991)) due to the imprecise estimation of stock return moments, it makes sense to follow the use of shrinkage to improve estimates of means (c.f. Jagannathan and Ma (2003)).

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