Diversified Index Research Articles

The impact of international diversification on the efficiency of investment portfolio within the Russian financial market

Subject. We address the diversified index investing strategy. Objectives. The focus is on the development of an attractive investment strategy within the risk/return coordinate system, to improve the return of a retail investor in the Russian financial market. Methods. We apply methods of analysis, synthesis, logical research based on the systems approach, statistical methods of data analysis (analysis of time series, correlation analysis), methods of optimal solutions, and the graphical analysis. Results. The paper shows the need to use a diversified strategy in the financial market. We developed an investment strategy providing better investment results at a lesser risk. The offered strategy may be integrated into financial instruments of various financial participants of the Russian financial market. The results of our investment strategy are compared with the results of brokers' strategies and the best assets for investment, i.e. gold, currency, real estate, bank deposits, and inflation. The study analyzes the basic principles of the formation of a diversification index-based strategy, formulates the main requirements for the best diversification within the Russian securities market, and presents a diversified index strategy, which is suitable for all classes of investors. Conclusions. In conditions of the modern Russian financial market formation, the results of investment strategies that market participants can offer to retail investors become a crucial factor, since they determine further directions of investment inflow, expand credit opportunities for companies, and contribute to the formation of an effective, progressive and deep financial market in the country.

Lessons from Quality Shareholders on Corporate Governance Practice, Research and Scholarship

Special Note: This Publication is part of The Quality Shareholder Initiative at the Center for Law, Economics and Finance (C-LEAF), at The George Washington University Law School, Prof. Lawrence A. Cunningham, Faculty Director. This Article presents original data and analysis addressing an understudied force in corporate America: the most patient and focused shareholders. Great attention has been devoted to short-term trading on the one hand and diversified index funds on the other, but scant attention has been focused on long-term concentrated investors. The George Washington University has been redressing this problem through a research initiative focused on such buy-and-hold stock pickers, whom Warren Buffett long ago dubbed 'quality shareholders'. GW’s Quality Shareholders Initiative ('QSI') is pleased to present highlights of the initial installment of this work in this Article in the Business and Finance Law Review at the George Washington University’s Center for Law, Economics, and Finance.

Infrastructure Equity and Firm Performance in India

The growing financing requirements coupled with tightening of fiscal purse strings point to the pertinence of market-based finance for infrastructure provision and enhancement. For this, the question of the sectoral performance of infrastructure takes centre stage and this becomes the basis for the present study. The study assesses the risk-return and volatility profile of Nifty Infra, the National Stock Exchange (NSE) sectoral index for the 30 biggest infrastructure firms in India vis-à-vis the broader Nifty 50 for the time period 2010–2018. The study employs the standard financial economic analysis methods of capital asset pricing model (CAPM) and generalized autoregressive conditional heteroskedasticity in mean (M-GARCH) model and finds the sectoral equity performance of infrastructure to be marginally below that of a broadly diversified index. Further, the study analyses the cash flow and leverage characteristics which are imperative factors in medium-term risk-return profile of infrastructure stocks. The disaggregated firm level analysis of 10 select firms reveals that rent-like return does exist for the biggest players in the sector due to past installed capacities, while the subcontracting mechanism percolates to meagre cash flows for smaller players, partly bearing the greenfield risks. This suggests the need for state-induced measures to prop up liquidity in equity trade for infrastructure firms. This would not only enhance the risk-return profile but also mitigate excessive volatility for these heavily leveraged firms.

Should Commodity Investors Follow Commodities' Prices?

Most institutional investors gain access to commodities through diversified index funds, even though mean-reverting prices and low correlation among commodities returns indicate that two-fund separation does not hold for commodities. In contrast to demand for stocks and bonds, we find that, on average, demand for commodities is largely insensitive to risk aversion, with intertemporal hedging demand playing a major role for more risk averse investors. Comparing the optimal strategies of investors who observe only the index to those of investors who observe all commodities, we find that information on commodity prices leads to significant welfare gains, even if trading is confined to the index only.

Should Commodity Investors Follow Commodities' Prices?

Most institutional investors gain access to commodities through diversified index funds, even though mean-reverting prices and low correlation among commodities' returns suggest that two-fund separation does not hold for commodities. In contrast to demand for stocks and bonds, we find that, on average, demand for commodities is largely insensitive to risk aversion, with intertemporal hedging demand playing a major role for more risk averse investors. Comparing the optimal strategies of investors who observe only the index to those of investors who observe all commodities, we find that information on commodity prices leads to significant welfare gains, even if trading is confined to the index only.

Infrastructure as an Investment: A Study of Listed Infrastructure Firms in India

The important task of infrastructure provision and enhancement faces ever rising financing requirement in the face of little fiscal space and this points to the pertinence of market based finance. This calls for a pressing need to gauge the sectoral performance of infrastructure and this study takes up this task. The study assesses the risk-return and volatility profile of Nifty Infra, the National Stock Exchange (NSE) sectoral index for infrastructure vis-à-vis the broader Nifty 50 for the time period 2010-2019. The standard financial economic analysis finds the sectoral equity performance of infrastructure to be marginally below that of a broadly diversified index. Further, the study analyses the cashflow and leverage characteristics which are imperative factors in medium term risk return profile of infrastructure stocks. The disaggregated firm level analysis reveals that rent-like return do exist for the biggest players in the sector due to past installed capacities, while the subcontracting mechanism percolates to meagre cashflows for smaller players, partly bearing the greenfield risks.

Diversified or Concentrated Factor Tilts?

The authors compare two approaches to single-factor index design: concentrated and diversified indices. From a conceptual perspective, the authors emphasize several issues with highly concentrated portfolios. Concentration in a few stocks reflects high confidence in the precision of the link between expected returns and factor exposure, whereas expected returns are notoriously difficult to estimate precisely. Moreover, the empirical asset-pricing literature emphasizes the need to construct broad portfolios that are not unduly influenced by a small number of stocks. The authors’ empirical analysis compares broader and more narrow stock selections, as well as two different weighting schemes, equal-weighting and cap-weighting. Their results show that concentrated factor-tilted portfolios come with problems. Trying to improve a cap-weighted factor-tilted portfolio’s performance by selecting fewer stocks that are most strongly tilted to the factor does not have any effect on risk-adjusted performance. With concentration, returns and risk increase. However, concentration leads to problems such as higher turnover, high idiosyncratic risk, and longer times to trade. Conversely, achieving concentration through a move to equal-weighing leads to higher Sharpe and information ratios, with only marginally higher turnover levels.

In Defense of Indexing

Behavioral finance advances strong arguments against market efficiency. Still, for the individual investor, markets are sufficiently efficient that an individual’s core holdings should be concentrated in low-expense, broadly diversified index mutual funds.

Study on the seed bank of urban green space

The soil seed bank composition, the type quantity, the spatial distribution and the species multiplicity of the urban green space were studied,the result shows that 42 kinds of plants appear in the soil seed bank of urban green land, among them 1 477 plants appear in first floor, the diversified index is 2.05, the degree of consistency is 0.58, the max diversified index of species is 3.56, second layers of diversified indexes of species, degree of consistency and diversified index of biggest species are lower than the first floor, it is 1.94, 0.56 and 3.47 respectively, plant kinds should be a little fewer. The abundant degree of plants, seed seedling amount, and the diversified index in the seed bank of the urban green land are lower than the natural second growth forest in outer suburbs. The soil seed bank of urban green land contains some potential populations, some plants can be used for city afforestation.

Local volatility function models under a benchmark approach

Without requiring the existence of an equivalent risk-neutral probability measure this paper studies a class of one-factor local volatility function models for stock indices under a benchmark approach. It is assumed that the dynamics for a large diversified index approximates that of the growth optimal portfolio. Fair prices for derivatives when expressed in units of the index are martingales under the real-world probability measure. Different to the classical approach that derives risk-neutral probabilities the paper obtains the transition density for the index with respect to the real-world probability measure. Furthermore, the Dupire formula for the underlying local volatility function is recovered without assuming the existence of an equivalent risk-neutral probability measure. A modification of the constant elasticity of variance model and a version of the minimal market model are discussed as specific examples together with a smoothed local volatility function model that fits a snapshot of S&P500 index options data.

Understanding the Implied Volatility Surface for Options on a Diversified Index

This paper describes a two-factor model for a diversified index that attempts to explain both the leverage effect and the implied volatility skews that are characteristic of index options. Our formulation is based on an analysis of the growth optimal portfolio and a corresponding random market activity time where the discounted growth optimal portfolio is expressed as a time transformed squared Bessel process of dimension four. It turns out that for this index model an equivalent risk neutral martingale measure does not exist because the corresponding Radon-Nikodym derivative process is a strict local martingale. However, a consistent pricing and hedging framework is established by using the benchmark approach. The proposed model, which includes a random initial condition for market activity, generates implied volatility surfaces for European call and put options that are typically observed in real markets. The paper also examines the price differences of binary options for the proposed model and their Black-Scholes counterparts.

Asset Allocation: Emerging Markets and Technology Stocks

During the last two decades, liberalization of capital markets in emerging markets was a common trend. Liberalization caused an increased responsiveness to world factors. Indeed, as argued in this paper, emerging markets are now behaving like certain developed markets' asset classes. This study develops a framework for asset classes' comparisons in an increasingly integrated world market, focusing on two aspects - diversification benefits and risk profiles. The set of tools used includes the standard Markowitz mean-variance analysis, spanning tests, the International CAPM, lower-moment CAPM and a conditional asset pricing model which allows time-variation in the betas. The empirical analysis focuses on two asset classes: emerging markets and technology stocks. It is found that after allowing investment in technological stocks, there are no significative gains from an aggregate investment in emerging market equities. Furthermore, the mean variance spanning test shows that emerging markets as a whole are spanned by developed market indices. The conditional framework shows that global risk factors have similar impact on the two asset classes in consideration, and in particular that conditional betas tend to covary simultaneously with business cycle proxies. These results contrast with previous studies, and can be justified by the increasing integration of emerging markets and a longer (and more realistic) time frame. The results show that the value added of diversified index funds of emerging markets' equities is low, and that individual country selection can provide very distinct results. The study has implications for global asset allocation, home bias and cost of equity estimation.