The Profitability of Option-Based Contrarian Strategies: An Empirical Analysis*
Tafadzwa Mugwagwa(School of Economics, Finance and Marketing, RMIT University)
Vikash Ramiah(School of Economics, Finance and Marketing, RMIT University)
Imad Moosa(School of Economics, Finance and Marketing, RMIT University)

Short-selling restrictions limit investors’ opportunities to profit from contrarian strategies in equity markets. We examine the proposition that incorporating options into contrarian strategies constitute a viable alternative to investors when short-selling restrictions are in place. In particular, we combine equities with the call and put options traded on the Australian Stock Exchange to investigate the profitability of contrarian strategies in the hybrid market and options market alone. We assess the practical issues in the execution of these approaches, including testing for the effects of limited liquidity and transaction costs. We also investigate how fundamental factors (such as dividend yield, firm size, book-to-market ratio, earnings per share, price-earnings ratio, value stocks, and market conditions) affect contrarian portfolios. The results show that employing options can enhance the profitability of contrarian strategies under certain market conditions.

*The authors wish to thank an anonymous referee for the useful comments. We acknowledge the invaluable research assistance of Gerard Hugh Maxted and Kaitlyn Choo in computation and programming. We also wish to thank the Australian Stock Exchange and the Melbourne Centre for Financial Studies for their invaluable assistance and support in the data gathering process. An earlier version of the paper was presented at RMIT in 2010 and the Annual Pacific Basin Finance, Economics, Accounting, and Management (PBFEAM) conference in 2012 and we thank all seminar/conference participants for their comments. More importantly, we would like to acknowledge the help and support provided by the late Professor Tony Naughton, to whom this paper is dedicated. Any remaining errors are the responsibility of the authors.

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Non-Tradable Share Reform, Liquidity, and Stock Returns in China
Chi-Hsiou D. Hung(Adam Smith Business School, University of Glasgow)
Qiuliang Chen(Independent)
Victor Fang(School of Accounting, Economics and Finance, Deakin University)

This article studies the influence of the non-tradable share reform in the cross-section of stock returns in China. Prior research has generally neglected this important development in the Chinese stock market. We find that the firm-specific illiquidity measures that reflect direct transaction costs, price impact and difficulties in trading immediacy, exhibit a positive and significant relationship with stock returns. These effects are particularly pronounced after the non-tradable share reform. Furthermore, in the post-reform era, portfolios with high illiquidity (i.e. high relative bid–ask spread, high Amihud illiquidity, low Amivest liquidity ratio) significantly outperform portfolios with low illiquidity, controlling for size, and book-to-market effects.

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When Is a Firm’s Information Asymmetry Priced? The Role of Institutional Investors*
Hoang Luong Luong(School of Banking and Finance, University of New South Wales)
Huong Giang(Lily) Nguyen(Department of Finance, La Trobe University)
Xiangkang Yin(Department of Finance, La Trobe University)

This study reexamines the competing claims that probability of informed trading (PIN) is priced in the cross-section of stock returns while adjusted PIN (AdjPIN), the component of PIN related to information asymmetry, is not. We find that behind these seemingly contradicting conclusions is the role of institutional investors, and the pricing of PIN and AdjPIN depends on institutional ownership. Only for those stocks with low institutional ownership are both PIN and AdjPIN priced. Our findings imply that investors require compensation for information risk only from stocks with low institutional ownership.

*We gratefully acknowledge the valuable comments from Jerry T. Parwada, Harald Scheule, Mark Humphery-Jenner, Darren Henry, Angela Low, Greg Jamieson, and the participants at the European FMA Annual Conference 2012 in Istanbul, FIRN Annual Conference 2011 in Queensland, Finance and Corporate Governance Conference 2012 in Melbourne, and Department Finance Seminar 2012 at La Trobe University. Dr Nguyen acknowledges the financial contribution of the Australian Research Council to this project. All errors and omissions are ours.

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The Global Financial Crisis and Its Impact on Australian Bank Risk*
Bernard Bollen(University of New England)
Michael Skully(Monash University)
David Tripe(Massy University)
Xiaoting Wei(Monash University)

This paper examines the global financial crisis (GFC) and its impact on Australian banking risk. An augmented market model is developed to identify changes in listed Australian bank systematic risk in relation to three key events: the GFC’s start in August 2007, the market downturn in Australian and global share markets in January 2008, and the announcement of Australia’s Deposit and Wholesale Funding Guarantee (DWFG) scheme on 12 October 2008. The study also examines changes in bank systemic risk during these event periods. The Australian market offers a unique opportunity to observe the impact of the introduction of the DWFG in that it lacked any explicit deposit insurance prior to the crisis. Initially, the crisis period had little impact on bank systematic risk while bank systemic risk increased considerably. The share market downturn caused a marked increase in both systematic and systemic risks for Australia’s major internationally connected banks followed by a reduction in both systematic and systemic risks with the introduction of the guarantee scheme for all Australian banks.

*The authors thank an anonymous referee and appreciate the comments and suggestions that have significantly improved the paper. The authors are also grateful for the comments and suggestions provided by Kathy Avram, Fernando Moreira, and the participants at the European Financial Management Association’s Annual Conference in Braga, Portugal, on 24 June 2011.

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Sovereign Ratings and Oil-Exporting Countries: The Effect of High Oil Prices on Ratings*
Robert V. Breunig(Crawford School of Public Policy, Australian National University)
Tse Chern Chia(Crawford School of Public Policy, Australian National University)

We investigate how high and rising oil prices in the 2003–2008 period affected the sovereign ratings of oil-exporting countries, after controlling for fundamentals. Based on a large dataset of countries from Standard and Poor’s and Moody’s, we find strong statistical evidence of a large ratings premium – nearly two notches – for those oil-exporting countries with a large share of net oil revenue to gross domestic product, relative to countries with similar economic fundamentals. We have some limited forecast information from the rating agencies and the effect increases when we include this information, providing further evidence that this ratings premium is not driven by expected improvements in fundamentals. This finding has implications for asset prices in oil-exporting countries and highlights the risk that in the event of a sharp unanticipated drop in oil prices, sovereign rating downgrades of oil-exporting countries could be sharper than the deterioration in their economic fundamentals.

*We would like to thank the editor of this journal and an anonymous referee for helpful comments and suggestions.

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