The Use of Derivatives by Investment Managers and Implications for Portfolio Performance and Risk
Kingsley Fong (School of Banking and Finance, The University of New South Wales, Australia)
David R. Gallagher (School of Banking and Finance, The University of New South Wales, Australia)
Aaron Ng (School of Banking and Finance, The University of New South Wales, Australia)

This study provides an empirical examination of derivative instruments used by institutional investors. Our analysis provides a unique insight into the role and benefits of derivative securities in active equity portfolio management. We contribute to the literature by using a database that comprises the periodic portfolio holdings and daily trades of institutional fund managers. The consequence of derivative use is analyzed using a number of performance and risk measures. Overall, we find the use of derivatives have a negligible impact on fund returns, and is primarily attributed to low levels of derivative exposure relative to total fund size. We also evaluate how derivatives are used by considering the trading strategies executed by active investment managers. Specifically, option trading patterns are consistent with the execution of momentum trading strategies. This study also documents that active investment managers prefer not to use options markets to engage in informed trading.
*The authors gratefully acknowledge the helpful comments and suggestions from an anonymous referee, Bruce Grundy (the Editor), Anthony Asher, and seminar participants at the 2004 Australasian Finance and Banking Conference.

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Bond Term Premium Analysis in the Presence of Multiple Regimes
Ron Guido (School of Banking and Finance, The University of New South Wales, Australia and State Street Global Advisors)
Kathleen Walsh (School of Banking and Finance, The University of New South Wales, Australia)

This papers addresses whether observed violations in the liquidity preference hypothesis (LPH) can be explained by the presence of multiple regimes in the term premia. The investigation directly tests the LPH via a series of inequality tests which allow the moments to be conditioned on observable information using an instrumental variables approach. The apparent rejection of the LPH is then investigated by modeling the term premia over time using a simple Bayesian Markov mixture model The results suggest the presence of time varying term premia and multiple regimes which may explain the apparent violations of the LPH.

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The SCoD Model: Analyzing Durations with a Semiparametric Copula Approach
Cornelia Savu (University of Muenster, Institute of Econometrics and Economic Statistics, Germany)
Wing Lon Ng (University of Muenster, Institute of Econometrics and Economic Statistics, Germany)

This paper applies a new methodology for modeling order durations of ultra-high frequency data using copulas. While the class of common Autoregressive Conditional Duration models are characterized by strict parameterizations and high computational burden, the semiparametric copula approach proposed here offers more flexibility in modeling the dynamic duration process by separating the marginal distributions of waiting times from their temporal dependence structure. Comparing both frame-works as to their density forecast abilities, the Semiparametric Copula Duration model clearly shows a better performance.
*The authors are very grateful to Mark Trede for his valuable comments and to Bruce Grundy and an anonymous referee, who provided many useful improvements. They are also thankful to seminar and conference participants at the University of Muenster, the German Statistical Association (2005 Meeting) and the Verein fur Socialpolitik (2005 Annual Meeting) for their helpful discussion. The authors are in particular indebted to conference participants at the Asian Financial Association (2005 Annual Meeting), the European Meeting of Statisticians (EMS 2005) and the International Workshop on Quantitative Finance (2006) for their extensive suggestions. Financial support from the Institute of Econometrics and Economic Statistics (IOW) and the German Research Foundation (DFG) is gratefully acknowledged.

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Order Flow Patterns around Seasoned Equity Offerings and their Implications for Stock Price Movements
Sahn-Wook Huh (Brock University, St. Catharines, Canada)
Avanidhar Subrahmanyam (University of California at Los Angeles, USA)

In this study, we employ order imbalance measures to provide evidence that there is cross-sectional heterogeneity in investor reactions to seasoned equity offerings (SEOs). The normally positive relation between imbalances and returns disappears for trade number imbalances but remains intact for dollar imbalances following SEOs. The return-imbalance delinkage is most pronounced for SEO stocks in which institutions (non-institutions) are net sellers (buyers). We also find that the SEO portfolio in which large institutional investors are net sellers strongly underperforms the complementary portfolio in which they are net buyers.
*We appreciate the constructive and thoughtful comments of Bruce Grundy (the editor) and an anonymous referee. We also thank Antonio Bernardo, Mi-Ae Kim, Unyong Pyo, Rossen Valkanov, Neal Stoughton, and seminar participants at UCLA, Brock University, Singapore Management University, National University of Singapore, SKKU, KAIST, and the 2005 Northern Finance Association Meetings, for valuable feedback. We express special thanks to Xiao Chen of the UCLA Academic Technology Services for providing useful programming assistance. Huh gratefully acknowledges generous financial support from the Office of Research Services at Brock University. All errors are solely ours.

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