Evaluating investment strategies among the International Financial Markets: three essays on investment decisions

Abstract

This dissertation consists of four chapters, each one of which studies investment strategies, covering the European (Germany) and the US market, and ends with documenting a careful and detailed analysis on the Chinese market. Also, I present three different approaches to investment strategies that contribute to the perception and understanding of investment activities. Chapter 1 is an extensive literature review analysis on investment strategies, focusing mainly on momentum and its versions. Momentum is one of the most commonly accepted investment class among investors and academics across all investment strategies. In Chapter 1, I introduce the power and importance of momentum for investors, its difference with cross-sectional momentum, the lead-lag effects, the profitability and portfolio performance in momentum strategies. Also, I analyze the risk adjusted time series momentum and finally, there is a discussion about the power of momentum as one profitable investment strategy. Chapter 2 consists the first research study of this dissertation, with title “Feeling Good, as a Guide to Performance: The Impact of Economic Sentiment in financial market Performance for Germany”. This Chapter illustrates the power of economic sentiment on German market as a guide for timing it, and how an investor could win the basic buy and hold strategy by taking advantage of sentiment as a strategy for various sub-periods from 1990 to 2017. Also, the economic sentiment influences the return and valuation of assets, the volatility and the bond yield spread, as it combines economic judgments, expectations, and attitudes of all economic agents. Chapter 3 bases on momentum performance and portfolio beta changes across time and sectors, with title Driven by portfolio beta changes and sectoral power in US stock market. Explaining momentum across time and sectors. This Chapter documents a careful and detailed analysis of the components of the NASDAQ index, that seeks to assess the role and what drives momentum portfolio performance in an appropriately and timely selection. I follow a three well-structure approaches. I examine the role of momentum portfolio performance, beta and Sharpe ratio across different economic sub-periods from January of 1985 to December of 2017 that are identified by clear exogenous events. Second, I study the time-varying sectoral characteristics of the components of the index and discuss the post-2007/2008 increase of healthcare companies’ participation in the index. Third, I perform a careful post-portfolio construction performance attribution to examine the impact of various characteristics of the portfolios themselves and the underlying fundamentals of the portfolios to explain the excess returns of momentum. Our findings align with the recent literature of asset management and momentum strategies and emerge for first time the highest sectoral percentage of momentum portfolio participation and how these findings are linked in the beta variation and portfolio expected returns across periods. Chapter 4 comprises the last section of my Ph.D thesis, with title “The Evolution of the Chinese Stock Market: A Review and a Historical Comparison”, which deals with an innovative subject matter: the characteristics of the Chinese stock market and its relationship with other financial markets. The innovation does not stand with the subject matter itself, but rather with the approach used to do the cross-comparisons with other market indexes. First, I provide a very detailed literature review on the historical evolution and characteristics of the Chinese stock market in general. The review covers every aspect of the Chinese market that has appear hitherto in the literature and provides a foundational framework for the rest of the analysis. This literature covers the Intraday Chinese trade, the intraday momentum, the role of the circuit breakers in the Chinese stock market, the co-moves among international markets and the Chinese investment sentiment. To understand the similarities and differences between the Chinese and other markets I collect data on a number of the most popular indices: US (S&P500 and RUSSELL 1000), France (CAC), Germany (DAX), and China covering Hong Kong and Shanghai (HIS, SSE50, CSI300, CSI500, and SSE) and I compute the returns, the realized risk and correlation measures. Importantly, I add in the analysis the dollar evolution of two major cryptocurrencies, the Bitcoin and the Ethereum, as alternative investments. The whole analysis is based on a very detailed historical sample split counting on the critical dates of the US, China, and Covid-19 period. This dissertation aims to illustrate the importance of investment strategies and decisions across different financial markets, market characteristics and investor’s behaviors. This is achieved by bringing famous and timeless investment strategies, such as the economic sentiment and momentum. Finally, it offers a well structure approach in the field of investment decision providing economic solutions and justifications about the evolution of the international markets and which market offers the best risk reward trade of.