Portfolio Diversification Research Articles

Innovative Financial Strategies for Economic Resilience in an Uncertain Global Market

In the face of economic uncertainty in the global market, innovative financial strategies have become increasingly important for enhancing economic resilience. This article employs a qualitative literature review method to explore the role of innovative financial strategies in fostering economic resilience amid uncertain market conditions. By analyzing a diverse range of scholarly articles, books, and research papers, this study offers insights into the potential strategies that organizations and policymakers can adopt to navigate turbulent economic landscapes. The analysis reveals several key innovative financial strategies that contribute to economic resilience. Firstly, diversification of investment portfolios emerges as a critical approach to mitigate risks associated with market volatility. By spreading investments across different asset classes and geographic regions, organizations can better withstand adverse market fluctuations. In conclusion, this article highlights the significance of innovative financial strategies in building economic resilience amidst uncertainty in the global market. By embracing innovation and collaboration, organizations and policymakers can adapt to changing market dynamics, promote sustainable growth, and mitigate the impacts of economic shocks. Further research is needed to explore the effectiveness and scalability of specific financial strategies in enhancing economic resilience across diverse contexts.

Inter-linkages Among Selected Stock Markets of South Asia: Revisit

The present study investigates the inter linkages among South Asian stock markets namely India, Sri Lanka and Pakistan. The topic is important for international investors because if the stock markets are found integrated with each other then they cannot reap profits from portfolio diversification or reduction in risk. Daily closing prices of the bench mark indices of three countries are taken for a period from 1 Jan. 2001 to 23th Feb. 2023. The paper used statistical tools such as descriptive statistics and correlation analysis and on the other hand, the econometric techniques namely Johansen’s Co integration test, VAR, Variance Decomposition Analysis, Impulse response function and Granger causality test and the selected stock markets are found interlinked in long run as well as in short run.

Equity markets and ESG dynamics: Assessing spillovers and portfolio strategies through time-varying parameters

Motivated by the recent surge of socially responsible activism, we examine the return and volatility transmission between the global Environmental, Governance, and Social index and traditional equity markets of G7 countries. For this purpose, we employ the TVP-VAR model on the returns and volatilities from 04 April 2011 to 09 September 2023. The variance co-variance matrix of the TVP-VAR model is used for portfolio analysis. Our finding indicates a significant level of connectedness between green and traditional equity markets. Moreover, green equity functions as a transmitter of both return and volatility spillovers to the traditional equity markets. In addition, our analysis of dynamic connectedness reflects a spike in both total return and volatility spillover amid the COVID-19 period. This indicates that the relationship between green and traditional equity markets intensifies during times of market stress and uncertainty which further infer implications for portfolio diversification. Furthermore, we calculated optimal asset allocation within portfolios and identified effective hedging ratios for different ESG and G7 equity pairs. The implications of the study include informing portfolio diversification strategies, and guiding decision-making for policymakers, hedge fund managers, and portfolio professionals amidst market uncertainties, based on identified market dynamics and connectedness.

EFFECTIVENESS OF THE INNOVATION PORTFOLIO IN POLISH ENTERPRISES – RESEARCH RESULTS

A single innovation project has a low probability of success, while the company’s chances of gaining a competitive advantage are low. Only a properly diversified innovation portfolio gives a chance for market success. The aim of the article is to analyze the issue of the effectiveness of innovation portfolio management in Polish enterprises, due to various external and internal factors, and also to identify clues determining the success of the innovation portfolio among enterprises in the future. For this purpose, a literature review in the area of the innovation portfolio was conducted. Also the method of analysis and criticism of the literature was applied. In the research process, empirical articles and Statistics Poland reports were analyzed. As a result of the analyses, effective ways to build innovation portfolio efficiency were identified by pointing out factors that can contribute to key optimization decisions (e.g., proper planning and diversification of the innovation project portfolio). Enterprises, in order to achieve innovation portfolio efficiency in difficult market conditions, should reallocate their resources to less risky innovation projects, and at the same time accepting the risks associated with introducing a transformational innovation.

Navigating environmental concerns and geopolitical risks: A study on green sukuk and Islamic equities amid climate crisis and the Russia-Ukraine conflict

Investors seek safe haven assets for portfolio diversification and risk management because climate change and environmental markets have recently become the concern of many governments, companies, households, politicians and academics. Therefore, this study examines the dynamic connectedness between sukuk (Islamic bonds), green sukuk, Islamic equities, and Islamic green markets for equity by comparing both in the short and long terms spillover and examining the effects of uncertainty factors on dynamic connectedness at different spillover horizons. In the short run, green Islamic equities, green sukuk and sukuk are net transmitters, and Islamic equities are net receivers. However, in the medium and long term, the behavior of these markets is vice versa. We then find the determinants of connectivity levels using macroeconomic conditions. We find that some of the determinants that cause return spillover in the short and medium term are quite different from those that cause return spillover in the long term. The results of portfolio analysis show that green sukuk are effective in hedging the risks of Islamic equities, green Islamic equities and sukuk. The performance characteristics of these potential diversification and risk mitigation benefits have been robust and enduring during the Covid-19 pandemic and the Russia-Ukraine War. Finally, our findings are of great importance to investors interested in ethical investing and for policymakers to maintain a healthy and resilient financial system.

Mortgage lending through a fintech web platform. The roles of competition, diversification, and automation

How do banks offer and price mortgages when an online platform enables them to reach regions where they have no branches? With unique data on responses from differently located banks to each applying household and a shift-share instrument for market concentration, we find banks to make more and cheaper offers to more concentrated local markets. We rationalize this as investments in lucrative market shares given customer switching costs. Banks also improve their inter-regional portfolio diversification with more attractive offers to regions more complementary to their home locales. Finally, banks` choices become increasingly automated, reducing their operating costs.

Dynamic linkage between environmental segments of stock markets: the role of global risk factors

ABSTRACT This study evaluates the links between representative indices of companies with high environmental performance and the propensity of such indices to economic and financial shocks. Five indices, representing environmental segments and four global macroeconomic and financial variables, were analyzed over a thirteen-year period, which included various crisis moments, such as the sovereign debt crisis, the COVID-19 pandemic and the onset of the Russia/Ukraine conflict. Using dynamic and nonlinear models, our research reveals statistically significant and consistent relationships between the variables under investigation, particularly during periods of global financial and pandemic crises. The analysis revealed that the VIXCLS is the most influential global risk factor, with certain risk factors being influenced by environmental segments, particularly Alternative Energy. This influence can create conditions conducive to contagion risk and diminish the benefits of portfolio diversification. This study contributes to a deeper understanding of the connection between environmental investments and their vulnerability to significant global events and risks.

The Effect of Sectoral Diversification on Return and Risk in Portfolio Management: An Application in Borsa Istanbul

This paper investigates sectoral diversification within Borsa Istanbul, aiming to elucidate its impact on portfolio risk and return dynamics. Spanning the timeframe from 2020 to 2022, the study meticulously analyzes stocks from pivotal sectors, including banking, energy, and iron and steel. Employing a robust methodology, the research harnesses Monte Carlo simulations to generate many hypothetical portfolios, subsequently evaluating them on the Efficient Frontier to identify optimal risk-return trade-offs. Key performance metrics, such as the Sharpe Ratio, Sortino Ratio, and Maximum Drawdown, further enrich the analysis, providing a granular view of portfolio behaviors. The significance of this study lies in its bridging of theoretical constructs of diversification with the tangible realities of an emerging market like Borsa Istanbul. Our main findings underscore the potential benefits of sectoral diversification while highlighting the complexities inherent in portfolio construction. The insights gleaned offer valuable guidance for investors, emphasizing the delicate balance between risk mitigation and return optimization in a diversified portfolio.

The investment behavior of China-connected mutual funds in the pandemic: Information advantage through operational link

Focusing on the origination of the COVID-19 outbreak in China, we examine the risk-taking behavior and performance of U.S. equity mutual funds indirectly exposed to China by holding U.S. firms with operational links to the country. We find that China-connected funds are associated with lower risk and higher abnormal returns at the outbreak of the pandemic. The information advantage underlying the outperformance of these funds is reflected in their trades being mimicked by that of other funds, and in the superior timing and stock picking ability of managers. These funds also maintain higher stock liquidity positions and better portfolio diversification during the pandemic. We further identify that fund managers' ethnic origin is the underlying channel for the outperformance of China-connected funds. Our results are robust across a wide range of tests.

Broadband Internet and the Stock Market Investments of Individual Investors

ABSTRACTWe study the effects of broadband internet use on the investment decisions of individual investors. A public program in Norway provides plausibly exogenous variation in internet use. Our instrumental variables estimates show that internet use causes a substantial increase in stock market participation, driven primarily by increased fund ownership. Existing investors tilt their portfolios toward funds, thereby obtaining more diversified portfolios and higher Sharpe ratios, and do not increase their trading activity in stocks. Overall, access to high‐speed internet spurs a “democratization of finance,” with individuals making investment decisions that are more in line with the advice from portfolio theory.

Assessing portfolio diversification via two-sample graph kernel inference. A case study on the influence of ESG screening.

In this work we seek to enhance the frameworks practitioners in asset management and wealth management may adopt to asses how different screening rules may influence the diversification benefits of portfolios. The problem arises naturally in the area of Environmental, Social, and Governance (ESG) based investing practices as practitioners often need to select subsets of the total available assets based on some ESG screening rule. Once a screening rule is identified, one constructs a dynamic portfolio which is usually compared with another dynamic portfolio to check if it satisfies or outperforms the risk and return profile set by the company. Our study proposes a novel method that tackles the problem of comparing diversification benefits of portfolios constructed under different screening rules. Each screening rule produces a sequence of graphs, where the nodes are assets and edges are partial correlations. To compare the diversification benefits of screening rules, we propose to compare the obtained graph sequences. The method proposed is based on a machine learning hypothesis testing framework called the kernel two-sample test whose objective is to determine whether the graphs come from the same distribution. If they come from the same distribution, then the risk and return profiles should be the same. The fact that the sample data points are graphs means that one needs to use graph testing frameworks. The problem is natural for kernel two-sample testing as one can use so-called graph kernels to work with samples of graphs. The null hypothesis of the two-sample graph kernel test is that the graph sequences were generated from the same distribution, while the alternative is that the distributions are different. A failure to reject the null hypothesis would indicate that ESG screening does not affect diversification while rejection would indicate that ESG screening does have an effect. The article describes the graph kernel two-sample testing framework, and further provides a brief overview of different graph kernels. We then demonstrate the power of the graph two-sample testing framework under different realistic scenarios. Finally, the proposed methodology is applied to data within the SnP500 to demonstrate the workflow one can use in asset management to test for structural differences in diversification of portfolios under different ESG screening rules.

The degree of Asian-European markets connectedness: examining the impact of global disorders using a spectral analysis

PurposeThis paper aims to examine potential diversification benefits between Eurozone (i.e. EURO STOXX 50) and key Asia markets: HSI (Hong Kong), KOSPI (South Korea), NIKKEI 225 (Japan) and TSEC (Taiwan). The sample covers the period from 04-01-2008 to 19-10-2023 in daily frequency.Design/methodology/approachThe empirical investigation is based on the wavelet coherence analysis, which is a localized correlation coefficient in the time and frequency domain.FindingsThe results provide evidence that long-term diversification benefits exist between EURO STOXX and NIKKEI, EURO STOXX and KOSPI (after 2015) and there are signs for the pair and EURO STOXX-TSEC (after 2014). During the short term, there are signs of diversification benefits during the sample period. However, during the medium term, the diversification benefits seem to diminish.Originality/valueThese results have crucial implications for investors regarding the benefits of international portfolio diversification.

Financialization, earnings volatility, and firm turbulence in the risk society

ABSTRACT This paper explores financialization through the lens of with profits accruing primarily through financial channels through risk commodification. While financialization ostensibly increases corporate profits, individual firms have been experiencing escalating volatility driven by heightened competition and technological disruptions. To the extent that firm instability is driven by something fundamental that cannot be reduced for shareholders through portfolio diversification, financialization simultaneously disperses risks to workers, fostering economic instability and exacerbating income inequality. The paper delineates a rise in earnings volatility among workers, attributing it to structural changes in labour markets marked by contingent work arrangements and diminished job security. This volatility reflects broader societal shifts towards a more precarious workforce, necessitating a re-evaluation of traditional measures of economic security. The confluence of these trends manifests in the intertwining of firm turbulence and wage volatility, particularly pronounced in the non-manufacturing sector. In parallel, financialization has also led to rising industrial concentration and market power in the U.S. economy that centralises profit. Superstar firms emerge as key actors, uniquely positioned to maximise their risk/return profile. By restricting profits to a small core of well-compensated workers, these firms are simultaneously offering higher wages while driving down the labour share, thus exacerbating income inequality.

CARBON RISK HEDGING: REDUCING PORTFOLIO CARBON RISK USING A BETA HEDGE RATIO

In response to the global transition to a low-carbon economy, carbon risk reduction in diversified portfolios has become imperative. We develop a new hedge approach to mitigate carbon risk, quantified as the carbon beta using a multi-factor model. By calculating a novel hedge ratio, investors are provided with an optimal allocation to a hedge asset, facilitating the effective reduction of carbon beta within their portfolios. Our findings highlight the effectiveness of this approach, which leads to carbon beta reductions without significant losses in risk-adjusted returns, implying that investors and fund managers can adopt this hedge strategy to moderate their carbon risk exposure. Compared to other carbon risk hedge methods, our approach only requires an investment in one more asset, making real-world applications relatively straightforward.

Does Investment in Defensive Stocks Act as a Buffer during Market Downturns?

The study examines the performance of defensive stocks during market downturns in the Indian stock market. The research focuses on the period from January 2000 to December 2023. In this study selected stocks from the Fast-Moving Consumer Goods (FMCG) sector (HUL, ITC, Britannia Industries) and Pharma sector (Sun Pharmaceuticals Industries, Dr Reddy Laboratories and Cipla) have been taken into consideration. Five key metrics are covered to assess the stock’s performance: Stock return, Correlation, Beta Compound Annual Growth Rate (CAGR), and Dividend yield. For stock return a comparison is made between stock market return and selected stock return, also the average return of each stock is calculated and compared with the average market return during market downturns. Correlation has been used to understand if there is a relationship between stock returns and nifty returns. Beta has been used to understand the sensitivity of the stock in relation to the market and Compound Annual Growth Rate has been used to analyze the long-term stability of each stock. The average dividend yield is calculated to understand the extra return that an investor can get on his investments on top of capital gain. The study findings revealed that incorporating stocks from the Fast-Moving Consumer Goods (FMCG) and Pharmaceutical (Pharma) sectors protects investors against market downturns, Additionally, the research highlights the long-term stability of returns associated with defensive stocks, making them a valuable component for investors seeking portfolio diversification and a buffer against market fluctuations. Keywords: Defensive Stocks, Market Downturns, Stock Market Return, Beta, CAGR, FMCG, Pharma.

Chinese stock market integration with developed world: A portfolio diversification analysis

This study investigates integration dynamics between the Chinese stock market and major developed counterparts—Australia, Germany, Japan, the UK, and the US—focusing on portfolio diversification. Using a comprehensive analytical approach from 2012 to 2022, encompassing events like the Belt and Road Initiative, the Shanghai market crash, US-China trade tensions, and the COVID-19 pandemic, the research employs descriptive statistics, unit root tests, cointegration analysis, and VECM-based Granger Causality Tests. Findings indicate modest integration, endorsing diversified portfolios for developed country investors due to higher returns in China with acceptable risk. Unit root analysis confirms cointegration with developed indices, indicating relatively low integration. Granger Causality Tests reveal bidirectional causality, emphasizing mutual influence. Notably, no causal link exists between the US and China, possibly due to regulatory disparities and the trade war. The study enhances understanding of Chinese stock market dynamics, supporting global economic intertwining and urging further openness of China's domestic shares for economic growth.

A comparative study of capital structure compositions in grain marketing and input supply cooperatives

PurposeThe objective of the study is to explore explanations for the capital structure compositions of farmer cooperatives, which have a unique equity structure with allocated equity as well as unallocated equity.Design/methodology/approachData came from a panel of US grain marketing and input supply cooperatives for the 2010–2020 period. The study is concerned with the proportions of debt, allocated equity and unallocated equity, which requires the application of a fractional multinomial panel model to ensure predictions fall within the observed data range (i.e. 0–1).FindingsLarger cooperatives have relatively high debt proportions. Diversification of the product portfolio has a positive effect on the debt proportion. Profitability is associated with higher debt proportions in input supply cooperatives and higher allocated equity proportions in grain marketing cooperatives. Over time, the proportion of unallocated equity increased. Overall, some results differ across grain marketing and input supply cooperatives.Practical implicationsIncreasing proportions of unallocated equity warrant a debate about the future value of ownership and governance by members of farmer cooperatives.Originality/valuePrevious empirical investigations of the capital structure compositions of cooperatives lacked a distinction between allocated and unallocated equity. Our results show that the proportions of the two equity accounts respond differently to given predictors. Furthermore, much of the prior empirical literature fails to separate cooperatives on the basis of economic activities (i.e. marketing, supply and mixed).

Do Green Bonds Affect Extreme Spillover and Hedging Effects Across Stocks and Commodities?

This study investigates the extreme connectedness network among Green bonds, stocks and commodities and its implications for portfolio diversification during the turbulent periods. To this end, we implement the novel QVAR methodology by Ando, Greenwood-Nimmo, and Shin to study the connectedness at the median, extreme lower, and extreme upper quantiles. The results reveal dynamic spillovers among markets. Interestingly, static spillover effects are stronger for the extreme upper and lower quantiles than for the intermediate quantiles. Commodities are the major net transmitters, whereas Shanghai Stock Exchange green bond is the net receiver of shocks in the system. These results are supported by the findings of portfolio management analyses, which suggest that Green bonds and gold could function as potential diversification assets, serving as safe havens, particularly for the stock and Brent markets. Our study provides valuable insights for investors aiming to optimize their hedging strategies, guiding risk management, and portfolio diversification.

Analisis Monitoring Pembiayaan Mudharabah dalam Mengurangi Resiko NPF pada Bank Muamalat KCP Sukaramai Medan

This research aims to analyze the monitoring and mitigation of NPF risk in mudharabah financing at Bank Muamalat KCP Sukaramai Medan. The research method used is a descriptive qualitative approach with data collection through observation, interviews and analysis of related documents. The analysis results show that Bank Muamalat has implemented various risk mitigation strategies such as financing restructuring, monitoring partners, and portfolio diversification to reduce NPF risk. The significant decline in the NPF level after implementing risk mitigation policies shows the effectiveness of this strategy in maintaining bank financial stability. In conclusion, the monitoring analysis of mudharabah financing at Bank Muamalat KCP Sukaramai Medan proves the importance of risk mitigation strategies in managing NPF risk and ensuring the sustainability of sharia banking business.

Climate Risk and Sustainable Investment in Asia

This study conducts an empirical analysis of the impact of climate risk on Environmental, Social, and Governance (ESG) investments in Asia. Using monthly data from 2015 to 2022 for 11 Asian countries and applying wavelet coherence analysis with a panel Auto-regressive Distributed Lag Model (ARDL) cointegration approach, the study concludes that (1) ESG and stock market returns are positively correlated during economic turmoil in China and Malaysia; (2) climate risk positively influences ESG returns, suggesting that it enhances returns during uncertain times rather than having a detrimental effect; (3) returns on conventional assets are negatively impacted by climate risk; and (4) ESG investments serve as an effective hedge against climate risk and provide a sound strategy for portfolio diversification in the Asian market.