Active Portfolio Management Strategies Research Articles

Practical Applications of Doing Well While Doing Good: The Elusive Quest for Green Bond Returns

In <ext-link><bold><italic>Doing Well While Doing Good: The Elusive Quest for Green Bond Returns</italic></bold></ext-link>, from the Spring 2023 issue of <bold><italic>The Journal of Impact and ESG Investing</italic></bold>, <bold>Juliusz Jablecki</bold>, of <bold>Narodowy Bank Polski</bold> and the <bold>University of Warsaw</bold>, finds that while the green bond label tends to be associated with slightly lower bond spreads, it does not significantly affect overall performance. Credit rating, duration, and industry sector membership have a much stronger influence. Additionally, green bonds do not outperform nongreen bonds during market sell-offs—in fact, they had worse drawdowns in the sell-off of March 2020. However, while green bonds by themselves do not offer a return premium, investors can use them in a data-driven active portfolio management strategy to deliver above-market returns.

The benefits of the diversification of E&amp;P operators in Brazil and the importance of Petrobras’ active portfolio management strategy

The benefits of the diversification of E&amp;P operators in Brazil and the importance of Petrobras’ active portfolio management strategy

Green bonds and implied volatilities: Dynamic causality, spillovers, and implications for portfolio management

The long-term and sustainable development focuses of green bond together with its increasing popularity drives the need for a better understanding of its hedging effects against market risks. Our study investigates whether and how green bond can act as a hedging instrument against implied volatility, a measure of forward-looking market uncertainty. We find evidence of significant time-varying connectedness between green bond and implied volatilities of the stock, energy, and commodity markets. Building on this characteristic, investors are required to adopt an active portfolio management strategy to ensure the hedging effectiveness of green bond against implied volatilities. Specifically, this strategy requires frequent switches between long and short positions in the green bond market. Our simple simulation study shows evidence that applying connectedness regime-dependent trading strategies can increase the hedging effectiveness of green bond against implied volatilities in terms of risk-adjusted returns.

Суверенные инвестиционные фонды: уроки коронакризиса

The paper deals with the sovereign wealth funds’ (SWFs) reactions to the economic and geo-political turbulence of 2020 emerged from COVID 19 pandemic. In recent decade, SWFs as state-run investment vehicles have proved to be the fastest growing group of institutional investors and have noticeably strengthened their role in the global financial system. According to the latest estimates, their cumulative AUM reached 9.1 billion US dollars as of December 2020. There are persuasive evidences that top 10 SWFs from Norway, China, Singapore, Persian Gulf and some other nations have evolved into full-fledged market-driven investors with an active portfolio management strategy. The fact that they continue to contribute the lion’s share (around 2/3) into the integral figures of SWFs’ performance as a group explains why the pandemic failed to undermine their progress. Also, it should be taken in mind that, in contrast to GFC of 2008–2009, the recent coronacrisis was featured by a seemingly surprising gap between the deep recession in real sector businesses and eventual growth of basic indexes of capital markets. Generally, this turned good for the financial market community, including many SWFs. For instance, the world’s largest Norwegian GPFG, despite an urgent sellout of some of its assets in order to help the national government in financing somewhat undermined state budget in the situation of deep slump at world oil market, reported, by the end of the year, the 10.9% operational profit and 8.2% increment of AUM (in terms of local currency). In the upcoming years, we may see the state funds vehicles to increasing change the whole landscape of the global investment playfield. It is highly likely that the post-COVID turbulent environment will increasingly push the SWFs not only to seek for viable alternatives to the increasingly fading traditional fixed-income instruments but to fundamentally change the mandates and the modes of operation. The traditional stabilization and saving state investment funds will step down in favor of a subgroup of the so called strategic SWFs, such as Singaporean Temasek, Chinese CIC, Saudi PIF, Indian NIIF, Malaysian Khazanah, Turkish TVF, Bahraini Mubadala, and Russian RDIF. Basically, they are charged to operate as the catalysts of national economic and social development. It may be expected that in the near future this category of state investors will see a growing number of newcomers.

The Impact of the Obama and Trump Presidential Election Cycles on the S and P500

ABSTRACT. The relationship between the US presidential election cycle and the S&P500 index is examined in this paper. We focus our attention on President Barack Obama and President Donald Trump presidential election cycles, as there is a research gap examining these two presidency periods. A comparative study is limited as Obama served two terms in office while Trump only one. Daily data from January 20, 2009 to November 16, 2020 was analysed. The selected dataset covers Obamas two terms and Trumps single term in office to examine cointegration (long-run relationships) and volatility dynamics exhibited by the S&P500. The study is framed around economic and political uncertainty that was captured by the US Economic Policy Uncertainty index (EPU). The ARDL, the LASSO and the GARCH models were implemented to facilitate the analysis of long-run dynamics, and volatility patterns, and to deal with modelling over parameterisation issues. The results suggest the existence of a long-run relationship for both the Obama and Trump administrations, showing that the EPU index could be connected to the behaviour of the S&P500. The long-term association between political uncertainty and the performance of the S&P500 offers insights into the importance of monitoring market volatility during presidential cycles as investors can generate profit and losses derived of markets reactions to the presidential cycle, suggesting the importance of an active portfolio management strategy during times of election. The research findings indicate low-levels of volatility persistence registered during Obamas second presidential cycle. Higher levels of market uncertainty were identified during the first cycle, results that are not surprising, as the Obamas first term in office was impacted by the global economic and financial crisis. This period was characterised by a delicate economic and financial climate, followed by government active intervention to address the effects of the crisis. In the context of the Trump admin- istration, his single term in office was shaken by the outburst of the global health crisis. Volatility persistence levels exhibited during Obama's first term in office were manifest again towards the end of Trump administration, mirroring the impact of the new health crisis and the administration lack of strategy and incoherent approach to the domestic and international impact of COVID-19.

A Sustainability-Oriented Enhanced Indexation Model with Regime Switching and Cardinality Constraint

Enhanced indexation is an active portfolio management strategy aimed to find a portfolio outperforming a market index. To ensure stable returns and to avoid extreme losses, a sensible enhanced indexation model should be sustainable, where the parameters of the model should be adjusted adaptively according to the market environment. Hence, in this paper, we propose a novel sustainable regime-based cardinality constrained enhanced indexation (RCEI) model, where different benchmarks and cardinalities can be imposed under different market regimes. By using historical observations, the RCEI model is transformed into a deterministic optimization problem with an ℓ 0 norm constraint. We design a partial penalty method coupled with the proximal alternating direction method of multipliers (ADMM) to solve the deterministic optimization problem. Numerical results in UK and US financial markets confirm the superb performance of the sustainability-oriented RCEI model and the efficiency of the algorithm.

BV–VPIN: Measuring the impact of order flow toxicity and liquidity on international equity markets

Order flow is the measure of a trader's exposure to the risk that counterparties possess private information or other informational advantages. High levels of order flow can culminate in market makers providing liquidity at a loss or in the suboptimal execution of trades. From a regulatory perspective, high levels of can be harmful to overall market liquidity and precede precipitous drops in asset prices. The bulk volume-volume-synchronized probability of informed trading (BV-VPIN) model is one way of measuring the toxicity component of order flow, and it has been successfully applied in high-frequency trading environments. We apply the BV-VPIN to daily data from a range of international indexes in order to extend previous analyses of its properties. We find that a rise in BV-VPIN effectively foreshadows high levels of volatility in the equity indexes of several countries. If a BV-VPIN futures contract were to exist, we show that it would exhibit safe haven characteristics during market downturns. In particular, a simple active portfolio management strategy that times investments in equities (risk-free assets) when BV-VPIN levels are low (high) outperforms a buy-and-hold strategy. Thus, we find support for the application of BV-VPIN in international equity markets as a risk monitoring and management tool for portfolio managers and regulators.

Dynamics of Indian Foreign Exchange Market Efficiency : An Adaptive Market Hypothesis Approach

Adaptive market hypothesis (AMH), a recent evolution in the field of finance, advocates that market efficiency is a time-variant element. In the present study, we empirically verified the time-varying degrees of market efficiency as per the propositions of AMH in the Indian foreign exchange market, which is assumed to provide an evolutionary alternative to the efficient market hypothesis (EMH). For the purpose, we used daily bilateral exchange rate between Indian rupee/United States dollar from January 1999 to December 2015. Statistical tests with linear and nonlinear approaches and better power properties unlike previous studies were used to trace the market efficiency. All tests employed unanimously supported time-varying nature of efficiency in foreign exchange returns, which adhere to the premise of AMH. The findings of the study confirmed market efficiency as an element which evolves with different market conditions, and thereby suggested for adoption of active portfolio management strategies for currency traders.

BV-VPIN: Measuring the Impact of Order Flow Toxicity and Liquidity on International Equities Markets

Order flow is a measure of a trader's exposure to the risk that counter-parties possess private information or other informational advantages. High levels of order flow can culminate in market makers providing liquidity at a loss or in suboptimal execution of trades. From a regulatory perspective, high levels of can be harmful to overall market liquidity and precede precipitous drops in asset prices. Bulk Volume VPIN (BV-VPIN) is one way of measuring the toxicity component of order flow that has been successfully applied in High Frequency Trading (HFT) environments. We apply the BV-VPIN to daily data for a range of international indices to extend previous analysis of its properties. We find that a rise in BV-VPIN effectively foreshadows high-levels of volatility in the equities indices of several countries. If a BV-VPIN futures contract exists, we show that it would exhibit safe haven characteristics during market downturns. In particular, a simple active portfolio management strategy that times investments in equities (risk-free asset) when BV-VPIN levels are low (high) outperforms a buy-and-hold strategy. Thus, we find support for the application of BV-VPIN in international equities.

Active Portfolio Management on the Romanian Stock Market

The homogeneity of expectations and rationality of decisions in the neo-classical portfolio theory imply the existence of an efficient market – meaning a market where assets’ prices coincide with their fundamental value. The efficient market hypothesis, stating that efforts to find over/under valued assets are unnecessary and will not produce results superior to a passive strategy, is clearly contrary to the active portfolio management strategy and its proponents sustain that investing in a tracking portfolio (that is a portfolio that closely tracks a composite stock index) will bring the maximum possible return. In this research we aim to assess the individual Romanian portfolios performance (real individual investment accounts on Bucharest Stock Exchange) in comparison with the international stock markets’ evolution (proxied by the multinational equity index MSCI World Index) and also with the overall evolution of the Romanian Stock Market (proxied by its composite index BET-C). We construct a so-called “Individual Portfolios Index” or IPI from the average daily returns weighted with the market value for 30 real individual portfolios. The comparative analysis reveals that the most efficient portfolio is the one tracking the multinational MSCI World Index, and also that IPI has a slightly lower risk and return than the Romanian composite index. Next, we evaluate the risk-adjusted portfolio performance for the index IPI, the composite Romanian index BET-C, and for each of the 30 individual accounts. We conclude that the overall value of an active portfolio management strategy on the Romanian equity market is inferior to the value of a passive strategy tracking the market index over the analyzed period.

Index Investing Goes Full Circle

Indexing today is anything but passive. Exchange-traded funds (ETFs) have never been more popular, but as the market has become increasingly crowded, the list of gimmicky, unproven indices that have ETFs tracking them is growing longer all the time. Reflecting a new perspective on investment management, investors are using passive instruments to implement active portfolio management strategies, also known as “portable beta” or “active indexing.” As investors increasingly assemble “portfolios of indices” to generate excess returns, the demarcation between alpha and beta blurs and the “active versus index” debate is rendered obsolete. The investment problem increasingly revolves around the timing of the beta exposures, but one has to wonder if “market exposure” investing has gone too far—if we’re right back where we started. The explosion of narrowly defined indexes, and finely segmented, beta-centric investment products, has reached the point at which investors have to ask how this differs from regular old stock picking. <b>TOPICS:</b>Exchange-traded funds and applications, mutual fund performance, portfolio construction

The Value Of International Equity Diversification: An Empirical Test

Three types of foreign equities traded in the U.S. capital marketsAmerican Depository Receipts, Direct Foreign Shares, and International Mutual Fundswere examined using active portfolio management strategy. These equities were studied from 1983 to 1986 to evaluate them empirically as a form of international diversification. The findings suggest that such foreign diversification, when guided by practitioner-feasible portfolio management, can substantially contribute to the performance of active portfolio management. However, not all foreign equities examined appeared to equally contribute to portfolio performance.

A Capability Study of Portfolio Insurance Strategies for ABS Funds and CDS Total Return Indices during the Subprime Crisis

Classic portfolio insurance theory analyzes combinations of one risky asset and one risk-free asset under a certain rule of trading. Due to a specified investment horizon an investor has the choice between static strategies on the one hand and dynamic insurance strategies on the other hand. Motivated by the downturn movement of the asset-backed and mortgage-backed securities markets and the rise of credit spreads during the subprime crisis starting in 2007, the authors focus on constant mix and stop-loss strategies as well as on constant-proportion portfolio insurance and its derivative time-invariant proportion portfolio, which are well accepted in theory and practice. The authors benchmark these strategies against a standard buy-and-hold portfolio and provide information on the capability of these strategies when managing European ABS, CDS total return index, and equity indices with respect to an investor9s risk appetite and risk awareness. The results support the conclusion that managing these asset classes and treating them as risky assets within active portfolio management strategies could have led to a significantly and nonrandom higher terminal portfolio wealth, allowing institutional investors to benefit from dynamic strategies even if they incorporate aggressive leverages.

On the Equivalence between Labor and Consumption Taxation

This article studies the equivalence between labor and consumption taxes in a stochastic context, where the government can undertake an active portfolio management strategy by investing in both risk-free and risky assets. Using a two-period model we show that such taxes let consumers make the same decisions, and can finance the same amount of government spending in each period.

Robust active portfolio management

Abstract : In this paper we construct robust models for active portfolio management in a market with transaction costs. The goal of these robust models is to control the impact of estimation errors in the values of the market parameters on the performance of the portfolio strategy. Our models can handle a large class of piecewise convex transaction cost functions and allow one to impose additional side constraints such as bounds on the portfolio holdings, constraints on the portfolio beta, and limits on cash and industry exposure. We show that the optimal portfolios can be computed by solving second-order cone programs -- a class of optimization problems with a worst case complexity (i.e., cost) that is comparable to that for solving convex quadratic programs (e.g. the Markowitz portfolio selection problem). We tested our robust strategies on simulated data and on real market data from 2000-2003 imposing realistic transaction costs. In these tests, the proposed robust active portfolio management strategies significantly outperformed the S&P 500 index without a significant increase in volatility.

Die Verwendbarkeit der ZEW-Aktienindex-Prognosen für aktive Portfoliomanagement-Strategien / The Usefulness of ZEW Stock Market Forecasts for Active Portfolio Management Strategies

Zusammenfassung Einzeltitelempfehlungen von Banken oder Fachzeitschriften treffen in den vergangenen Jahren bei der Investorenschaft immer häufiger auf Misstrauen. Zunehmende Aufmerksamkeit wird hingegen indexbasierten aktiven Portfoliomanagement-Strategien gewidmet. Trotzdem werden nur selten Prognosen zur Entwicklung von Aktienindizes veröffentlicht. Im deutschsprachigen Raum publiziert lediglich das Zentrum für Europäische Wirtschaftsforschung (ZEW) regelmäßig Prognosen zu wichtigen internationalen Aktienindizes. Im vorliegenden Aufsatz wird der Frage nachgegangen, ob diese Prognosen geeignet sind, um darauf aktive Portfoliomanagement-Strategien aufzubauen. Neben der grafischen Gegenüberstellung von Prognosedaten und tatsächlichen Marktdaten werden die einschlägigen Wendepunktfehlerquoten, der Theilsche Ungleichheitskoeffizient „neuer Art“ (U2), der GOVA-Koeffizient und die Prognosequalitätsmatrix als Beurteilungsmaßstäbe herangezogen. Es zeigt sich, dass alle sechs untersuchten Prognosezeitreihen eine gegenwartsorientierte Verlaufsanpassung aufweisen. Fünf von sechs Prognosezeitreihen weisen eine schlechtere, die sechste eine nur minimal bessere Prognosequalität als die entsprechenden Zeitreihen naiver Prognosen auf. Insgesamt muss festgestellt werden, dass die Aktienindexprognosen des ZEW im Zeitraum von Oktober 1994 bis Dezember 2002 keine geeignete Grundlage für die Umsetzung indexbasierter aktiver Portfoliomanagement-Strategien darstellten.

E-R modeling and visualization of large mutual fund data

Existing visualization techniques used by mutual fund managers focus on the active portfolio management strategies. However, an important aspect of mutual funds is to visualize and understand the fund composition observed at specific points in time. Such a visualization will leverage the fund manager with the power to investigate and to capture forecasting differences and future performance. Our research here is to design a new visualization system that has an Entity-Relationship (E-R) model at the heart of the system and reveals not only the aggregate behavior of the mutual funds, but also the behavior of the mutual fund managers who manage these funds. We find some preliminary evidence that mutual funds in the world market represent a strong geographical pattern, and some potential niche markets are now extracted that stands out in the global scenario such as the returns from funds that belong to a specific country. For the analysis of security distribution, it helps to distinguish the most popular securities from other ordinary ones for an increased realization of profit. Also based on our experience with such huge world fund data to achieve a trade-off between time efficiency and graphics quality, we recommend the approach of splatting visualization, which indicates the influence of a particular security in a fund's portfolio.