Australian Finance Program
Collaborators: Steve Easton, Neil Hartnett, Katherine Uylangco, Paul Docherty and Doowon Lee
Program Chair: Steve Easton
This program brings together researchers with a focus on the Australian financial markets. The Australian market provides unique institutional features that can be used as a laboratory to test theories in finance. In larger markets the information becomes contaminated, however, in certain instances this contamination can be eliminated in the Australian market utilising appropriate data. We believe we are well positioned to be able to exploit the opportunities from our own market.
The current research project focuses on the collaboration of a finance group focused on some of the more unique aspects of the Australian financial markets. Within this group we are proposing four projects as outlined below.
Project 1: Identifying Arbitrage on Wesfarmers and Wesfarmers Partially Protected Shares. This research aims to identify transactions that have taken place where arbitrage is the best explanation for the transaction. These transactions are often computer traded, hence with the trade by trade data available from SIRCA we can identify transactions that has been initiated by the same broker, at exactly the same time, with the same number of shares but where there is a buy position on one trade and a sell position on another. This information will also indicate the profitability of this activity for each of the brokers under review.
Project 2: Foreign Exchange Contracts for Difference in Australia. Contracts for Difference (CFD’s) have been an important innovation in financial futures markets, making leveraged trading more accessible to a wider range of market participants. However, to date only one study has been conducted in this area. The Australian Stock Exchange now offers a number of CFD’s on indices and individual shares. It also now offers CFD’s on currencies instead of futures contracts. This study would investigate the effect of introducing CFD’s to replace futures contracts on foreign exchange trading in Australia. It would investigate four aspects of these contracts; firstly comparing the volume of trading in foreign exchange CFD’s and futures contracts, secondly comparing the price of futures contracts with the underlying spot market, thirdly investigating how CFD’s could be used to hedge foreign exchange obligations more effectively than futures contracts and fourth, investigating the lead lag relationship between CFD’s and the underlying market.
Project 3: An examination of Factors Affecting Asset Prices. Over the years several factors have been identified as adding value to a company’s share returns including the company’s size and growth potential. Using data provided for each individual trade provides us with a unique opportunity to examine more closely the effect of these factors on asset pricing in the Australian market. This information could also be analysed on an industry basis to determine whether factors are more influential in certain industry groupings or at different times of the business cycle.
Project 4: An Investigation of Transactions by Traders with Asymmetric Information. It is widely accepted that traders have access to different information than the general public. Brokers spend a lot of time and money gaining access to this information which the average investor can’t replicate. Brokers use this information to position their portfolios to take advantage of this information. This project would use information that is available through SIRCA to identify the transactions of individual brokers. It can then be used to compare the trading activities of brokers with different trading quantities.