Research Projects
Current Research:
Recently completed projects include:
- A Theory of Market Price Volatility: We suggest an an alternative method of forecasting ex-ante returns from equity markets by observing changes in liquidity, supply of capital, inv estor behaviour and pricing anomalies. We hypothesise that the time between market peak and trough is comparable to the time from trough and the r ecovery to implied "fair value"; this is followed by a much shallower trajectory toward a new peak. This slowing results in a greater frequency of observations above "fair value", which in turn raises the mean. This distorts the market's impression of "normal", while supporting speculation and ultimately more volatile and fragile prices. The clustering of returns above fair value also reduces implied volatility, leading investors to underestimate the potential for significant market events. We argue that a traditional sinusoidal view of market behaviour leads investors to over-invest toward the "peak" of a cycle, and under-invest when markets are oversold. We approach our research by exploring the relationship between stages in market cycles and time [peak-to-trough, trough-to-mean, mean-to-peak], and questioning whether trade volume and market depth can be used to predict changes investor sentiment. If this proves to be the case, the "opportunity cost" for risk averse investors will be less than previously thought, which would match our observation that in the later stages of a "bull" market, traditional assumptions of prospect theory do not hold.
- TSA Risk-Return Model v2.1: Theoretical model using Cauchy probability density to measure tail risk and options.
- H-Minus Model v2.0: Exploring the break-even between cash and "risky assets" over normal market cycles.
- A Better Way of Measuring Horizon Risk: We test the validity of a 12-month measurement period for risk and returns. We suggest separating risk and volatility, reframing these to reflect both the asset's characteristics - including market cycle, where appropriate - and investor's time horizon.
Recently completed projects include:
- TSA Risk-Return Model v1.4: Theoretical model for equity risk premia vs mean reversion of equity pricing over time, adjusted for market cycles
- H-Minus Model v1.0: Break-even between cash and "risky assets" over normal market cycles.
- Virtual investment: The investment case for Bitcoin and other cryptocurrencies: An exploration of the technology and investment potential of virtual currency networks, taking into account network design (decentralised ledger), technology (problems of scale), economics (energy intensity of technology, inflation, negative carry) and legal (tax avoidance, scams and security). Following Bitcoin, we find considerable barriers to widespread adoption of the technology, particularly with regards to energy consumption which we find would require between 10% and 150% of current global energy consumption just to deliver a 3% p.a. to transaction merchants ("miners"). Negative carry (vs Real return on fiat currencies) results in a net deterioration in BTC exchange rates. We find that BTC is unsustainable in its current form, and does not qualify to be classified as a legitimate investment. We advise investors to avoid BTC. Current price c. US$17,000.
- Risk Simulation for Portfolios Containing Complex Assets: Includes allowances for pricing anomalies, and covariance changes during anomalies re-pricing.
- Influence of Capital Structure on Market and Portfolio Risk: Study of the relationship between market risk and return where leverage is held inside the corporate structure, or externally by the investor.
- 2017 Superannuation Review: Analysis of $1 trillion of Australian superannuation assets; representing approximately 21 million accounts.
- The Public Market Premium: Exploring why public markets value earnings so much more than private markets. We find that results cannot be fully explained by illiquidity or size premia. This appears to be significant, both a statistical level (frequency), and size, with a public-private gap of up to 8% existing across many industries. This suggests a good opportunity for astute investors. Difficulty in entry/exit more suited to very long term investments or professional Private Equity firms. Key Person risk is expected to be much higher, however, for many small (and medium) businesses, the key persons are senior employees and may retained at sale.
Investment Opportunities
From time-to-time we offer the opportunity for private investors to co-invest in new projects. These opportunities are available to sophisticated investors only, with terms (including return targets) set on a project-by-project basis. Click here for more information.