Research Applications in Industry
The Centre for Investment Research is involved in many areas of investment research of relevance to private investors, the financial markets industry and government agencies, such as financial regulators, where its research findings have important applications.
The following are some examples of the areas of research currently being carried at the Centre.
Fund Management (hedge funds, mutual funds, pension funds)
The Centre is currently working on a number of projects in the area of fund management in the hedge fund, mutual fund and pension fund industries. This research concentrates on performance measurement and risk management among funds available to investors in Ireland, the U.K and U.S. The research examines fund performance in terms of stock picking ability as well as market timing skills. Research on investment funds is especially required as standard, widely cited, estimates of fund performance are often flawed and may lead to false inferences. For example, fund return distributions generally exhibit non-normal characteristics and non-linear and/or time varying relationships with risk. Failing to account for these characteristics tends to overstate performance. This research also applies innovative methodologies to distinguish skill from luck in portfolio performance in order to identify genuine outperforming investment funds.
Among hedge funds, for example, return distributions generally exhibit negative skewness, excess kurtosis and non-linear and/or time varying relationships with risk factors. Failing to account for these characteristics will overstate performance. Robust statistical estimation procedures (such as Residual Augmented Least Squares, RALS) are used to account for the non-normality observed in fund returns. Non-linear Smooth Transition Regressive (STR) models are also applied to evaluate non-linearity in the relationship between hedge funds and risk factors. The time-varying nature of these relationships are examined using a Kalman Filter methodology.
Further related research examines persistence in performance, i.e. the question of whether past performance is a reliable indicator of future performance – an assumption often wrongly made by investors.
Another current project is examining liquidity risk in equity markets and the pricing of this risk. Liquidity risk stems from the presence of commonality in liquidity which represents a non-diversifiable risk to investors. The aim of this study is to investigate if liquidity risk is priced and if it affects the cross sectional performance of funds through the use of multi-factor models. This study uses a long time series of daily data in order to more closely analyse the role of liquidity. Higher frequency intra-day stock market data are also used. Liquidity proxies that require intra-day data are measured for the UK for the first time, e.g. the Probability of Informed Trading measure and the parameters of the price impact model. Finally, the relationship between mutual funds and liquidity risk is investigated.
A substantial area of the Centre’s research is in testing the profitability of a wide range of trading strategies. In particular, work is being done in yield curve spread trades, carry trades, FX technical trading rules, momentum equity trading techniques and equity pairs trading. For example, pairs trading is a statistical arbitrage strategy employed by hedge funds in an attempt to produce significant returns with low levels of risk. The pairs are constructed by finding two securities with similar pricing patterns. Once the spread between the two equities widens, the investor goes long (short) the lower (higher) priced equity expecting to profit from a mean reversion. Statistical techniques are used to identify the equity pairs.
Please refer to the site’s section on Discussion Papers for printable versions of full research papers.
The Centre for Investment Research provides a link between the university and financial services sectors. Such pathways through which university research may be disseminated in the financial services industry are an important part of Ireland’s strategy to develop a knowledge based high-value added financial services sector.
The Centre for Investment Research is open to engaging in relevant consultancy projects for private and public sector organisations. If you have a project that may benefit from the expertise of the researchers in the centre then contact us at firstname.lastname@example.org.
The Centre for Investment Research at UCC also offers tailored training workshops linked with the financial services industry for professional executive development. These workshops are designed to facilitate the flow of world-class research into the financial services industry. If you are interested in hosting a Centre for Investment Research workshop in your organisation then contact us at email@example.com.