Does this make sense?

CFA General
#1

I am testing the whether listed stock exchanges offer investors value as an equity investment. I have formulated four hypotheses. I’m not sure if they are right though.

H0: The MSCI World Financials index will outperform an equally weighted portfolio composed of listed stock exchanges.

Ha: The MSCI World Financials index will underperform an equally weighted portfolio composed of listed stock exchanges.

H0: An equally weighted index of developed market exchanges will outperform an equally weighted index of emerging market exchanges.

Ha: An equally weighted index of developed market exchanges will underperform an equally weighted index of emerging market exchanges.

H0: The Barclays Capital U.S. Aggregate Bond Index will outperform an equally weighted index composed of randomly selected listed exchanges.

Ha: The Barclays Capital U.S. Aggregate Bond Index will underperform an equally weighted index composed of randomly selected listed exchanges.

#2

No, it doesn’t make sense.

You said that you formulated 4 hypotheses, but I see only 3 (with their alternatives).

(Note, too, that we now have subscripts.)

#3

I still don’t understand what you’re seeking to prove?

#4

Dafuq? This sh*t is why I don’t come to this part of the website any more.

#5

Basically I am investigating whether listed stock exchanges offer investors attractive returns. I realize past performance isn’t indicative of future performance. I am merely examining historical returns over a six year period. I’ve also included a blend of developed market exchanges and emerging market exchanges to see which exchanges on average perform better

#6

Apologies. I meant three hypotheses. But are the ones I have stated incorrect? I think maybe the null hypotheses are stated incorrectly?

#7

Attractive returns related to what? Attractive is a subjective measure. What is attractive for one might not be for another.

In some six-year periods, better performance may have emerging markets, while in other six-year periods better performance might be realized by developed markets. Your time period sample is too short. You should consider longer periods of time. Be aware of structural breakdowns in the economies of emerging markets.

#8

I agree the time period is short. However, the exchanges have only began to publicly list in the past 5-10 years. So my time frame is limited.

#9

For some of this aren’t you looking at cap weighted vs. equal weighting? What are your trying to get at? And H3 - bonds vs. stocks? Not understanding what you are trying to do, I am confused by what investigating these three is going to tell you.

You say your measuring value of the exchange to the investor. So why are you looking at indexes? Wouldn’t you look at what the exchange does? That is provide rapid and low cost transactions. Wouldn’t you look at things like time for execution. How much the prices moved when executing trades. And transaction costs both explicit and implicit. I get that looking at exchange performance relative to a broader market index might tell you something. But I think it is too macro and various aspects will cancel each other out, and it may not tell you much. I would go more micro in the analysis and build up to conclusions about the exchanges.

#10

Jack, you do understand that an “exchange” is not the same thing as an index, right? I think you’re looking into indices, but you’re erroneously describing them as exchanges. Before you attempt to prove any hypothesis, you probably should nail down your understanding of the basics.

#11

EDIT: I reread your post and I think you’re trying to make a mini-index of stock exchanges. All this will tell you is whether the sub sector of “exchanges” has outperformed. Not sure what you mean by “value.”

#12

Yes I have constructed ‘mini-indices’. I basically have created three equally weighted indices- a blended index of developed market and emerging market exchanges, a developed market exchange index and an emerging market exchange index. My sample consists of 17 listed exchanges. I realise my sample size is quite small to make realisitic assumptions, but there are not many listed stock exchanges.

When I speak of value I am referring to risk-adjusted returns. So I am looking at the risk-return profiles of the exchanges in question. I was thinking of using the Sharpe ratio for this. Do you think the Treynor ratio is better?

#13

^ I personally don’t think this is compelling research, regardless of the risk metric used. This kind of thing is done daily at buy side equity managers on sectors and sub sectors, and would hardly be groundbreaking (let’s say they don’t “add value,” as you’re defining it…so what? What’s the underlying point?). Also, if you’re trying to make a statement about value-add to society, you’ll find many times there is not a one-to-one ratio between stock price increases and societal value (i.e., a good company is not necessarily a good stock).

Let me ask you, why target exchanges? What is the underlying, actual hypothesis you’re trying to get at?