Can options be used to enhance equity returns: evidence from Australia

Mugwagwa, T 2011, Can options be used to enhance equity returns: evidence from Australia, Doctor of Philosophy (PhD), Economics, Finance and Marketing, RMIT University.

Document type: Thesis
Collection: Theses

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Title Can options be used to enhance equity returns: evidence from Australia
Author(s) Mugwagwa, T
Year 2011
Abstract The start of the 21st century witnessed the rejuvenation of structured financial products that date back to the early 1970s. Since 2000, the derivatives market has experienced significant growth as interest in structured financial products has increased substantially. Despite this strong growth, both in Australia and globally, recent evidence shows a lack of interest from investment managers in utilising derivatives. To this effect, the Australian Stock Exchange has undertaken a number of initiatives to raise the awareness of opportunities for investors in the options market. This thesis aims to contribute to the literature on structured financial products and assist investors in examining opportunities in the Australian options market.
This thesis investigates a number of structured financial products in particular: the buy–write strategy and extreme portfolio trading strategies. It first examines the performance of the buy–write option strategy on the Australian Stock Exchange and analyses whether such an investment opportunity violates the efficient market hypothesis on the basis of its risk and returns. The study investigates the relation between buy–write portfolios returns and past trading volume and other fundamental financial factors, including dividend yield, firm size, book-to-market ratio, earnings per share, price earnings ratio, and value stocks within these portfolios. It also tests the profitability of the buy–write strategy during bull and bear markets.
The thesis next examines extreme portfolio trading strategies. It investigates the profitability of equity, call, and put option-based extreme portfolio trading strategies on the Australian Stock Exchange and analyses whether they generate consistent abnormal returns. It also analyses the relation between equity- and option-based extreme portfolio returns and different financial fundamentals, as well as the performance of extreme portfolio trading strategies during different market conditions.
As far as the buy–write strategy is concerned, the results of this study are consistent with the literature. This thesis determines that the buy–write strategy offers superior risk-adjusted returns for low levels of out-of-the-moneyness; however, it notes contrary evidence for deeper out-of-the-money portfolios. In line with other Australian buy–write strategy studies, this study also finds an Australian preference for options with a maturity of around three months. It shows that quarterly rebalancing periods offer better returns for the buy–write strategy. This study’s empirical results on extreme portfolio trading strategies are consistent with the literature, demonstrating that applying options in extreme portfolio strategies is profitable in Australia and that options can be used to enhance equity contrarian strategy profits.
Degree Doctor of Philosophy (PhD)
Institution RMIT University
School, Department or Centre Economics, Finance and Marketing
Keyword(s) Options
Buy-Write Strategy
Contrarian Trading Strategies
Extreme Portfolio Strategies
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Created: Thu, 01 Dec 2011, 13:39:00 EST by Guy Aron
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