When betas meet the cross section: a hybrid risk model for equity portfolios

PurposeThe purpose of this paper is to develop a new framework to test the hypothesis that portfolio model predicts a negative correlation between stock prices and exchange rates in a trivariate transmission channel for foreign portfolio equity investment.Design/methodology/approachThis paper utilizes panel data for eight economies to extend the Dumitrescu and Hurlin (2012) Granger non-causality test of heterogeneous panels to a trivariate model by integrating the Toda and Yamamoto (1995) approach to Granger causality.FindingsThe evidence suggests that stock prices Granger-cause exchange rates and portfolio equity flows Granger-cause exchange rates. However, the overall panel evidence casts doubt on the explicit trivariate model of portfolio balance model. The study shows that Indonesia may be the only case where stock prices affect exchange rates through portfolio equity flows.Research limitations/implicationsThe proposed test does not account for potential asymmetries or structural shifts associated with the crisis period. To isolate the impact of the Asian Financial crisis, this paper rather splits the sample period into two sub-periods: pre- and post-crises. The sample period and countries are also limited due to the use of the balance of payment statistics.Practical implicationsThe study casts doubt on the maintained hypothesis of a trivariate transmission channel, as posited by the portfolio model. Policy makers of an economy may integrate capital market and fiscal policies in order to maintain stable exchange rate.Originality/valueThis paper integrates a portfolio equity inflow variable into a single framework with stock price and exchange rate variables. It extends the Dumitrescu and Hurlin’s (2012) bivariate stationary Granger non-causality test in heterogeneous panels to a trivariate setting in the framework of Toda and Yamamoto (1995).

9 - The validation of the equity portfolio risk models

The fundamental purpose of securities investment is to obtain benefits. In order to diversify risks, many investors invest many kinds of securities simultaneously to achieve the maximum returns. Risk measurement methods and portfolio model have become the major issues faced with the financial sector. This paper analyses the calculating method and applicable condition of Markowitz risk remuneration model, Arrow-Pratt risk remuneration model and Jia & Dyer standard risk model. This paper gives the investment model optimized by mean entropy and portfolio model including transaction cost. Empirical analysis shows that the portfolio model is suitable for calculating the return and risk of portfolio. According to the model, investor’s different degree of risk avoidance will form different investment strategies.

On the stability of portfolio selection models

Aiming at the high complexity of parameter optimization for portfolio models, this paper designs a distributed high-performance portfolio optimization platform(HPPO) based on parallel computing framework and event driven architecture. The platform consists of the data layer, the model layer, and the excursion layer, which is built in a component, pluggable, and loosely coupled way. The platform adopts parallelization acceleration for backtesting and optimizing parameters of portfolio models in a certain historical interval. The platform is able to docking portfolio model with real-time market. Based on the HPPO platform, a parallel program is designed to optimize the parameters of the value at risk(VAR) model. The performance of the platform are summarized by analyzing the experimental results and comparing with the open source framework Zipline and Rqalpha.

In this paper, we offer a new strategic portfolio model for national IT R&D project selection in Korea. A risk and return (R-R) portfolio model was developed using an objectively quantified index on the two axes of risk and return, in order to select a strategic project and allocate resources in compliance with a national IT R&D strategy. We strategize using the R-R portfolio model to solve the non-strategy and subjectivity problems of the existing national R&D project selection model. We also use the quantified evaluation index of the IT technology road map (TRM) and the technical level reports (TLR) for the subjectivity of project selection, and try to discover the weights using the analytic hierarchy process (AHP). In addition, we intend to maximize the chance for a successful national IT R&D project, by selecting a strategic portfolio project and balancing the allocation of resources effectively and objectively.

In this paper, we offer a new strategic Portfolio Model for national IT R&D project selection in Korea. A risk and return (R-R) Portfolio Model was developed using an objectively quantified index on the two axes of risk and return, in order to select a strategic project and allocate resources in compliance with a national IT R&D strategy. We strategize using the R-R Portfolio Model to solve the non-strategy and subjectivity problems of the existing national R&D project selection Model. We also use the quantified evaluation index of the IT technology road map (TRM) and the technology level Survey (TLS) for the subjectivity of project selection, and try to discover the weights using the analytic hierarchy process (AHP). In addition, we intend to maximize the chance for a successful national IT R&D project, by selecting a strategic Portfolio project and balancing the allocation of resources effectively and objectively.

Purpose – Commodity price volatility and small variations in climate conditions may have an important impact on the creditworthiness of any agricultural project. The evolution of such risk factors is vital for the credit risk analysis of a rural bank. The purpose of this paper is to determine the importance of price volatility and climate factors within a default risk model. Design/methodology/approach – The authors estimate a generalized linear model (GLM) based on a structural default risk model. With the estimated factor loadings, the authors simulate the loss distribution of the portfolio and perform stress test to determine the impact of the relevant risk factors on economic capital. Findings – The results indicate that both the price volatility and climate factors are statistically significant; however, their economic significance is smaller compare to other factors that the authors control for: macroeconomic conditions for the agricultural sector and intermediate input prices. Research limitations/implications – The analysis of non-systemic risk factors such as price volatility and climate conditions requires statistical methods focussed on measuring causal effects at higher quantiles, not just at the conditional mean, this is, however, a current limitation of GLMs. Practical implications – The authors provide a design of a portfolio credit risk model, that is more suited to the special characteristics of a rural bank, than commercial credit risk models. Originality/value – The paper incorporates agricultural-specific risk factors in a default risk model and a portfolio credit risk model.

The problem how to evaluate and monitor the quality of credit risk models has recently received much attention. The discussions about the inclusion of internal models in the Basel Capital Accord highlight this fact. Basel II does not allow the use of full-scale credit portfolio risk models for regulatory capital calculation because regulators are concerned that model quality cannot be validated accurately enough. However, banks are allowed to use internal credit rating systems although it is by far not clear how accurately their quality may be evaluated. This paper discusses the current state-of-the-art concerning methods and empirical results for validating both credit portfolio risk models and internal credit rating systems. In order to allow for a meaningful assessment of the scope and limits of model validation we closely follow and compare our results to the existing literature on validating market risk models.

Actuarial Science is a branch of applied and financial mathematics which has nowadays developed rapidly in the field of insurance. Specifically, bankruptcy theory, as one of the most important branches of risk theory, studies the evolution of the surplus, id est the changes in the income and the expenses over time for an insurance portfolio. Moreover, it is particularly essential to model the amounts of compensation in the model of collective risk and select the appropriate distributions for the description of both individual sizes and total losses. Over many years, Gamma distribution which is a continuous distribution with two parameters (scale and shape), is widely used not only in statistical analysis but also in the field of actuarial science. They are distributions that have now been studied in detail and for this reason are widely applied in the modeling of insurance portfolios. Nevertheless, the mixtures and the convolutions of these distributions are of particular interest for the actuarial science and risk management. For the purpose of this thesis, we will try to investigate through examples the asymmetry and the kurtosis for the mixtures and the convolutions of Gamma distributions in order to analyze their shape and identify what combinations of parameters and weights (for mixtures only) give us specific characteristics respectively. At the same time, we will attempt to approach the convolution of Gamma distributions through other distributions because it is widely known that convolutions of Gamma do not always have a closed form and we will also study their application in the risk theory and the collective model of portfolios.

To assess the riskiness of credit-risky portfolios is one of the most challenging tasks in contemporary finance. The decision by the Basel Committee for Banking Supervision to allow sophisticated banks to use their own internal credit portfolio risk models has further highlighted the importance of a critical evaluation of such models. A crucial input for a model of credit-risky portfolios is the dependence structure of the underlying obligors. We study two widely used approaches, namely a factor structure and the direct specification of a copula, within the framework of a default-based credit risk model. Using the powerful simulation tools of XploRe we generate portfolio default distributions and study the sensitivity of commonly used risk measures with respect to the approach in modelling the dependence structure of the portfolio.

Risk and portfolio models

A new model of adaptability, the diversified portfolio model (DPM) of adaptability, is introduced. In the 1950s, Markowitz developed the financial portfolio model by demonstrating that investors could optimize the ratio of risk and return on their portfolios through risk diversification. The DPM integrates attractive features of a variety of models of adaptability, including Linville's self-complexity model, the risk and resilience model, and Bandura's social cognitive theory. The DPM draws on the concept of portfolio diversification, positing that diversified investment in multiple life experiences, life roles, and relationships promotes positive adaptation to life's challenges. The DPM provides a new integrative model of adaptability across the biopsychosocial levels of functioning. More importantly, the DPM addresses a gap in the literature by illuminating the antecedents of adaptive processes studied in a broad array of psychological models. The DPM is described in relation to the biopsychosocial model and propositions are offered regarding its utility in increasing adaptiveness. Recommendations for future research are also offered. (PsycINFO Database Record

The International Workshop on Operational Research (IWOR) conference held in Madrid (5–7 June 2008) was intended to be a tribute to the outstanding professional and scientific career in Operational Research of Professor Laureano F. Escudero on the occasion of his 65th birthday. During the conference, the participants presented more than 100 papers on many different topics in Operational Research. Furthermore, six plenary lectures were delivered by Brenda Dietrich (Math at IBM), Rudiger Schultz (Dominance Constraints in Two-stage Stochastic Programming), Gautam Mitra (Downside Risk and Portfolio Models), Monique Guignard-Spielberg (Primal and Convex Hull Relaxations for Nonlinear Integer Programming Problems), Maarten H. van der Vlerk (Some Approaches to Solving Stochastic Mixed-Integer Programs), and Martin Grostschel (Controlling Paths), which are related to several of the topics in which Professor Escudero contributed. This special issue of TOP has a double purpose. On the one hand, it contains a collection of selected papers from an open call for papers on Operational Research topics, and, on the other hand, it constitutes an additional tribute to Professor Laureano F. Escudero. Since this special issue is devoted to the figure of Professor Laureano F. Escudero, before going to summarise the contents of it, we provide a brief biography of him. Laureano F. Escudero Bueno (September 23rd, 1942) is PhD in Economic Sciences and currently full professor at the Department of Statistics and Operational Research at the Rey Juan Carlos University (Madrid, Spain, since 2007). Previously, he

This paper investigates the time-invariant and the time-varying betas of the international capital asset pricing model (CAPM) for North American and European equity portfolio returns over the period from August 1, 1990 to June 30, 2016. Our quantitative examinations using the full vector-half (VECH) model reveal the following interesting evidence. First, we find that (1) the time-invariant international CAPM beta value for North American equity portfolio returns and that for European equity portfolio returns, which are derived from the standard ordinary least squares (OLS) method, are both close to one. In contrast, our examinations find that (2) the time-varying international CAPM betas of North American equity portfolio returns are lower than one before 1996, and slightly higher than one after 1996. Moreover, our investigations further reveal that (3) the time-varying international CAPM betas of European equity portfolio returns are lower than one before around 2004, and clearly higher than one after around 2004.