UQ Business School head Professor Tim Brailsford is working with colleagues at Monash University to develop the ‘holy grail’ of financial market economics.
Now in its third year, the massive $1 million plus project attempts to deliver a unified theory on the pricing of stock returns that transcends national borders.
The long quest for a universal valuation method that increases the efficiency of capital allocation has intensified in recent years in response to the increasing growth, complexity, and globalisation of financial markets.
Professor Brailsford said the need to develop a unified theory of stock return pricing was urgent in Australia.
“The capital pool in Australia is growing fast and is expected to overtake Japan as the largest pension fund market in the Asia Pacific by 2015,” Professor Brailsford said.
“The growth in Australian funds under management and the greater flexibility in choices on retirement saving now being offered have left fund managers looking at ways to improve traditional techniques of portfolio management.”
The aim is to test the application in Australia of the findings of leading US academics Gene Fama and Ken French, whose multi-factor model of pricing risk revolutionised financial market research in the early 1990s.
“The general principles of financial markets should transcend national boundaries,’ Professor Brailsford said.
“However, there are institutional details in specific markets that distort some of those principles – individual tax regimes for instance, differences in terminology, and variations in accounting standards.”
The focus of Professor Brailsford, his colleague Professor Robert Faff of Monash University, and their team of about 80 researchers, is to build a deep, accurate database that will allow the back-testing of simulated portfolios to see how far the multi-factor model applies in Australia.
Professor Brailsford said the project would have been impossible to contemplate without the intellectual and financial support of Dimensional Fund Advisors (DFA).
“In the absence of a comprehensive database, you can’t really test the deep-value portfolio theory in Australia and that’s one of the great benefits of this project,” he said.
“Nothing of this scale has ever been attempted.
“We’ve had to design a whole series of protocols to ensure that the data capture is both accurate and verifiable.”
By late 2007, the research team hopes to be able to begin publishing preliminary findings from the three-year project.
For more information, contact Cathy Stacey on (07) 3365 6179 or 0434 074 372.
