Investment Horizon Research Articles

Equilibrium multi-period investment strategy for a DC pension plan with incomplete information: Hidden Markov model

In the financial market with both observable and unobservable market states, this article explores the equilibrium investment strategy for a DC pension plan with the mean-variance criterion in a discrete-time setting. The dynamics of the partially observed market state are described by a discrete-time finite-state hidden Markov chain. There is a riskless asset and a risky asset in the financial market, where the return rate of the risky asset depends both on the observable and unobservable market states. Meanwhile, the stochastic salary process is also modulated by the observable and unobservable market states. Under the framework of non cooperative game, we first define the equilibrium investment strategy for the multi-period mean-variance DC pension plan. By adopting the sufficient statistics method, the investment problem for the mean-variance DC pension plan with incomplete information is transformed into the one with complete information. The closed-form equilibrium investment strategy is derived by solving the extended Bellman equation. Finally, numerical results show that the incomplete information has significant impacts on the equilibrium investment strategy and the equilibrium efficient frontier. Neglecting the reality of incomplete information in the financial market will reduce the investment benefit of the DC pension plan. The longer the investment horizon, the greater the investment benefit loss for the DC pension plan.

Optimism in Property Markets

House valuation involves forecasting household demand for a neighborhood, whereas commercial property valuation involves forecasting area economic activity. Yet, we show optimistic expectations for both. We investigate further possible disparities due to different cultures of home ownership, short, medium, and long-term investment horizons, and bullish or bearish trends. We use an experimental framework to demonstrate expectations are optimistic under all conditions. Buyers use trends to surmise future prices in bull markets, expect price increases in oscillating markets, and price reversals in bear markets, failing to anticipate price busts. Policy implications are important in preventing property boom-induced financial crises.

Analysis on Different Investment Styles of Mutual Fund Investors

ABSTRACT The research paper provides a comprehensive analysis of the diverse landscape of mutual fund investing, focusing on the various investment styles adopted by investors. It categorizes investors into four main styles - conservative, moderate, aggressive, and speculative - based on their risk tolerance, investment horizon, and market perceptions. Through the examination of historical data and case studies, the paper evaluates the performance of these styles in different market conditions and economic environments. Additionally, the research investigates the factors influencing investors' style selection, including demographic variables, past experiences, and psychological biases. It also explores the role of financial advisors and fund managers in guiding investors towards suitable styles and mitigating risks. Overall, this research contributes valuable insights to the field of mutual fund investing, benefiting both individual investors and financial professionals.

COMPARATIVE STUDY OF DEBT AND EQUITY FUNDS IN INDIA

The purpose of this study is to examine the features of debt and equity funds in the Indian financial market, including their suitability, liquidity, tax implications, risk-return profiles, and other relevant factors. Through the purchase of fixed-income assets such as government bonds, corporate bonds, and money market instruments, debt funds look for investments that have low volatility and consistent returns. Equity funds, on the other hand, have a significant amount of their assets invested in equities, which can result in increased volatility but may also result in higher returns over the long term. According to the findings of the study, equity funds have the potential for bigger returns, while debt funds have a lower risk profile. This is the conclusion reached after comparing the two types of funds. Furthermore, the study investigates the tax consequences of both types of funds, which is crucial because taxes play a large influence in the decisions that are made regarding investments. Debt funds are subject to the short-term capital gains tax if they are kept for a period of time that is shorter than three years. The tax rate on long-term capital gains, on the other hand, is twenty percent, and indexation advantages are included. For equities funds that have been held for more than a year, the tax rate is 10% without indexation on profits that exceed ₹1 lakh. However, the tax rate for gains that are held for a shorter period of time is 15%. This study also investigates liquidity, which is another important factor to consider. Due to the greater liquidity of debt funds in comparison to individual fixed-income instruments, investors have more flexibility to withdraw their money from debt funds when they require it. This is because debt funds have better liquidity. It is possible for the underlying stocks of an equity fund to have an effect on the liquidity of the fund. In general, large-cap funds have superior liquidity than small-cap funds or sector-specific funds. In addition, the various investor profiles and the ways in which debt and equity funds are incorporated into their portfolios are discussed. Those who are retired, conservatives who are looking for returns with a reduced level of risk, or investors who have time horizons that range from short to medium are suitable candidates for debt funds. On the other hand, equity funds are more suitable for long-term investors who are willing to take on a greater degree of risk in the expectation of potentially bigger returns. Additionally, they are an excellent choice for individuals who are interested in riding the stock market's growth wave. Although debt and equity funds are complementary additions to any investor's portfolio, they perform distinct functions and have distinct risk-return profiles. Nevertheless, they are both beneficial to the investor. Prior to making decisions on investments, investors should do a comprehensive evaluation of their level of risk tolerance, investment horizon, and financial objectives. They ought to also give some thought to the possibility of diversifying their investments across a variety of asset classes. A comparative analysis like this one will prove to be a very useful resource for individuals who are considering making investments in India's financial markets. Keywords:- Debt funds, Equity funds, Risk-return profiles, Taxation, Liquidity, Investment suitability, Indian financial market.

Evaluating the Efficiency of Alternative Investment Vehicles in Modern Portfolio

Abstract: The evolving global economic landscape has prompted investors to diversify their portfolios beyond traditional stocks and bonds, leading to the increasing prominence of alternative investments. This study examines the role and effectiveness of alternative investment options, such as private equity, hedge funds, real estate, and commodities, in modern investment portfolios. These non-traditional assets offer unique opportunities for risk management, diversification, and potential growth, making them appealing choices for investors seeking to enhance their portfolio's performance and stability. The research highlights the key factors driving the growing appeal of alternative investments, including their ability to provide diversification benefits by spreading risk across a range of assets with low correlation to traditional market indices. Additionally, these investments present opportunities for increased returns, particularly in low-interest rate environments, and enable investors to access emerging markets and industries, broadening their investment horizons

GENERATIONAL INVESTMENT PATTERNS IN MUTUAL FUNDS: A COMPARATIVE STUDY OF GENERATION X AND MILLENNIALS

This Master’s thesis examines the investment patterns in mutual funds across two distinct generational cohorts: Generation X and Millennials. The primary aim of this study is to analyze and compare the investment behaviors and preferences between these two groups, focusing on factors such as risk tolerance, investment time horizon, and preferred fund types. Utilizing a mixed-methods approach that combines quantitative data analysis of investment portfolios with qualitative surveys and interviews, this research provides a comprehensive view of how generational differences influence investment decisions. The quantitative analysis involves a statistical examination of mutual fund holdings and transactions sourced from a proprietary database covering the period from 2010 to 2020. Meanwhile, the qualitative component features insights from over 200 individual interviews with representatives of each generation, supplemented by surveys to gauge attitudes towards various investment strategies and market outlooks. Initial findings suggest significant divergences in the investment strategies between Generation X and Millennials. Generation X investors tend to favor income-focused and balanced funds, displaying a preference for stability and long-term growth, influenced possibly by their proximity to retirement. In contrast, Millennials are more inclined towards equity-heavy portfolios and show a greater propensity for embracing emerging market funds and ESG (environmental, social, and governance) themed investments, driven by higher risk tolerance and a longer investment horizon. This thesis not only highlights the distinct investment preferences of these generations but also delves into the sociopolitical and economic factors that might influence these patterns. Furthermore, it discusses the implications of these generational differences for financial advisors, mutual fund managers, and policymakers. By identifying and understanding these generational investment behaviors, industry professionals can better tailor their approaches to meet the needs and preferences of each demographic group, enhancing client satisfaction and engagement. This comparative study contributes to the financial industry’s understanding of demographic shifts and their impacts on market trends, offering valuable insights for developing more targeted and effective investment products and strategies.

Cross-category connectedness between Shanghai crude oil futures and Chinese stock markets related to the Belt and Road Initiative

This paper aims at investigating the cross-category time-varying frequency connectedness between Shanghai crude oil futures (INE), the CSI Belt and Road theme index, and seven Chinese stock markets affiliated with the Belt and Road Initiative (BRI), namely infrastructure, high-speed railway, green electricity, communication, ferrous metals, agriculture, and new energy markets. Using the novel time-varying parameter VAR (TVP-VAR) frequency connectedness model, we identify how the connectedness between INE and BRI-related stocks varies between the short-term, and long-term investment horizons. Our empirical findings reveal that the connectedness between INE and BRI-related stocks significantly increases during extreme market movements and mainly occurs at shorter time horizons. On the other hand, both INE and BRENT serve as net shock receivers, exhibiting relatively limited connectedness to BRI-related stocks. Notably, the correlation between INE and BRI-related stocks is significantly stronger compared to that observed with BRENT. We also observe that the INE exhibits a relatively strong correlation with infrastructure and ferrous metals compared to other stock markets, displaying a discernible bidirectional spillover effect. Our results document some practical enlightenment for investors and policymakers with various time horizons.

Financial Arrangement by Employees in Formal Workplace Environment in Nigeria: Case of Cooperative Societies in Obafemi Awolowo University, Ile-Ife, Nigeria

Individual savings in the current day business world and work place have been channelled on a self-arranged/self-managed platform in the nomenclature of cooperatives irrespective of social class and or income group. Cooperatives have become household name in every organisation: its significance is ringing more than bank name now rings. This research analysed the criteria for being a member in cooperatives as well as the extent of satisfaction that members in the cooperatives perceived they had as a result of their membership subscription. Primary data were collected with the aid of structured questionnaire from 396 respondents who are staff of the Ohafenu Awolowo University, Ile-Ife. Results indicated that there was no constraint to being a member inasmuch as the potential applicant is on the University payroll and such a potential member has not violated the floor of limit of take home pay. Method of monthly contribution into cooperative purse is deduction from source through the bursary department. It was also indicated that monthly contribution is based on a member's capacity in terms of how much a person cares to contribute. Eight major areas of members’ investment horizon were identified as having been promoted by cooperative assistance. Eighteen propositions were raised in terms of members’ belief, identification, and satisfaction with their cooperative, six of such propositions had strong support by respondents. Four variables also indicated significant difference among members when tested on t-test scale. Lastly, nine variables were significant in influencing value added for members. In the overall, members were very satisfied with their cooperatives for saving purposes.

Examining the quantile cross-coherence between fossil energy and clean energy: Is the dependence structure changing with the COVID-19 outbreak?

The advent of COVID-19 has markedly affected financial and energy markets. Clean energy positions itself as a feasible substitute for fossil fuels, and the crisis has altered the interdependence of these two counterpart markets. This study uses quantile cross-spectral analysis to investigate the dependence structure features of the fossil and clean energy markets, pre- and post-COVID-19 outbreak, under various market conditions and across different investment horizons. Empirical results suggest an anomalous intensification or inversion in the interaction between fossil and clean energy under extreme market conditions post-COVID-19 outbreak, manifesting either an extraordinarily high or low dependency. Additionally, the asset dependence structure exhibits increased heterogeneity across investment horizons after the COVID-19 outbreak, with short-term structures demonstrating higher volatility, while medium- and long-term structures show similarity. Finally, by generating a dynamic energy portfolio, this paper measures the investment allocation weights of each asset before and after the emergence of COVID-19. Findings indicate an increased need for investment in natural gas, crude oil, and clean energy post-COVID-19 outbreak, suggesting a reduction in coal investment. The analyses aim to assist energy investors in enhancing their economic decision-making processes and refining their portfolio management strategies.

Practical Analysis of Stock Market Under ESG

In today's era, climate change brought about by the greenhouse effect is gradually bringing more and more economic losses and natural disasters. In order to mitigate the negative impact of climate change, many countries have jointly formulated a 1.5°C climate scenario, which has brought a lot of impact on the global economy and industry development (Henderson et al., 2020). At the same time, my client commissioned me to build a portfolio that complies with the 1.5°C climate scenario, and the shares must be included in the S&P 500 Net Zero 2050 Climate Transition ESG Index as of 30/09/2022. The total portfolio is $100,000, and the benchmark designates the S&P 500 Net Zero 2050 Climate Transition ESG Index. Because the investment horizon is short and only six weeks, I chose semi-active management in my portfolio management process, and the rebalancing method was selected as percentage rebalancing. Finally, based on macro and industry analysis and relative valuation and technical analysis of the corresponding stocks, I selected ten stocks: Starbucks Corporation, Tesla, Inc., Amgen Inc., Cisco Systems, Inc., Eversource Energy, The Coca-Cola Company, and Expeditors International of Washington, Inc., Trans Digm Group Incorporated， Netflix, Inc., S&P Global Inc. I calculated their respective shares using the Markowitz model and bought and rebalanced, but unfortunately, my portfolio did not work as expected. The sector index fell by 4.87% in the week of the investment term, but my portfolio fell by 7.45% and performed poorly. Among them, the collapse of Tesla due to special events and my previous judgment of Tesla were greatly affected, and although its share price was only 9.94%, its share price fell by 33.74%. Although the late-stage rebalancing gave me hope for the better, the short investment horizon became a significant obstacle to the improvement of my portfolio.

The tail risk safe haven property of China's energy futures against US market implied volatility

This paper analyses the tail risk contagion of US market implied volatility (USIV) on China's energy futures (CEF) markets, exploring how to utilize operations in the CEF to achieve a safe haven. Leveraging CEF characteristics to simultaneously take both long-/short-positions and engage in long-/short-run investment horizons, this paper defines eight different CEF safe haven attributes to counteract the tail risk of extreme increases in USIV. Using trading data from March 27, 2018, to October 30, 2023, the empirical results show that, first, in the analysis of the entire sample period, China's coking coal futures can serve as a weak safe haven, aiding long-position investors in mitigating the tail risks associated with US gold and stock market implied volatility. Coking coal futures also assist short-position investors in countering US stock market implied volatility tail risk. Second, in the sub-period analysis, the safe haven attributes of CEF exhibit strong heterogeneity and asymmetry across different periods. Finally, the time span during which CEF exhibits a particular safe haven attribute does not persist for an extended period.

Do green investments improve portfolio diversification? Evidence from mean conditional value-at-risk optimization

This study investigates how green investment assets improve optimal portfolio diversification in terms of tail downside risk. We use the wavelet conditional value-at-risk ratio to explore the benefits of adding green assets to conventional portfolios. We quantify risk based on the contagion between conventional stock market indices and green environmental assets, including a sustainability index, clean energy, and green bonds. Our findings emphasize the high variance between conventional stock pairs, providing evidence of contagion effects before and during the COVID-19 pandemic. We show that including clean energy and green bond indices in conventional portfolios reduces the extreme risk of portfolios. In addition, we find that the diversification benefits of clean energy, green bonds, and safe-haven investments apply especially in the short term during the pandemic. Finally, we show that the considered portfolios could not decrease long-term risk during the COVID-19 crisis because of the systematic risk spread. Our portfolio optimization design supports the superiority of clean energy and green bonds in portfolio diversification over the sustainability index. These insights can be used by portfolio managers to inform diversification in different investment horizons.

ESG rating changes and portfolio returns: A wavelet analysis across market caps

This study implements advanced wavelet analysis to affirm a strong positive connectedness between E, S, and G pillar ratings and equity portfolio returns, particularly at low frequencies or long-term investment horizons. However, for E-pillar strategies, a transient negative "equity greenium" phase in 2019–2020 indicates that elevated E-ratings coincide with reduced financial performance. Bidirectional relationships challenge conventional ESG score notions, with weaker global ESG return connections, mid-cap portfolio exceptions (2015–2017), and short-term impacts on large caps (2019–2021). Inter-pillar connections, especially post-2015 E and S dynamics, unveil evolving complexities. Hierarchical connectedness patterns among portfolios underscore unique dynamics, emphasizing the multifaceted ESG landscape.

Analyzing Portfolio Optimization in Cryptocurrency Markets: A Comparative Study of Short-Term Investment Strategies Using Hourly Data Approach

This paper investigates portfolio optimization methodologies and short-term investment strategies in the context of the cryptocurrency market, focusing on ten major cryptocurrencies from June 2020 to March 2024. Using hourly data, we apply the Kurtosis Minimization methodology, along with other optimization strategies, to construct and assess portfolios across various rebalancing frequencies. Our empirical analysis reveals significant volatility, skewness, and kurtosis in cryptocurrencies, highlighting the need for sophisticated portfolio management techniques. We discover that the Kurtosis Minimization methodology consistently outperforms other optimization strategies, especially in shorter-term investment horizons, delivering optimal returns to investors. Additionally, our findings emphasize the importance of dynamic portfolio management, stressing the necessity of regular rebalancing in the volatile cryptocurrency market. Overall, this study offers valuable insights into optimizing cryptocurrency portfolios, providing practical guidance for investors and portfolio managers navigating this rapidly evolving market landscape.

Why Are Corporate Investment Horizons Shrinking? Uncovering the Spillover Effects of Shareholder Litigation

Existing research shows that shareholder pressures can shorten firms’ investment horizons. Yet studies have so far been limited to the actions shareholders take directly toward a focal firm. Considering that shareholder pressures may spill over between organizations, we argue that firms shorten their investment horizons following shareholder-initiated lawsuits against their peers in an effort to boost their short-run performance and preempt being sued themselves. We further posit that the negative relationship between this form of litigation threat and a firm’s investment horizon is weakened among firms with more long-term shareholders or future-focused CEOs, both of which guard against managers becoming overly short-term oriented. An examination of 18 years of shareholder litigation data supports our theory. This study highlights shareholder litigation as a distinct form of shareholder voice and one that is sufficiently potent to create spillover effects between firms.

Too much incentive to innovate? CEO stock option exercise and myopic R&D management

AbstractInnovation is a key driver of firm success. To encourage innovation, firms often offer equity‐based compensation, such as stock options, to better align CEOs' personal interests with shareholder value. Drawing on agency theory, we argue that stock options may not always benefit a firm by encouraging innovation. Instead, we demonstrate that CEOs intending to exercise their stock options have the incentive to be myopic in R&D management so that they can temporarily boost the stock price and, thus, increase their personal wealth. Using a unique multi‐source dataset of 335 Standard & Poor 500 companies from 2007 to 2015, we find evidence supporting this argument. Moreover, the findings suggest that factors that can affect the perceived pressure to promote innovation by CEOs might reshape the association between stock option exercise and myopic R&D management. For example, power resulting from CEO duality decreases the perceived pressure to promote innovation, which increases the likelihood of CEOs engaging in myopic R&D management when exercising their stock options. However, when shareholders present a long investment horizon or when firms have high innovativeness, CEOs perceive more pressure to promote innovation and thus are less likely to opt for myopic R&D management while exercising stock options. The findings provide important insights for better understanding and controlling managerial myopia in innovation management.

Correction to: Does effect of risk and uncertainties on US sectoral returns differ across different investment horizons and market conditions

Correction to: Does effect of risk and uncertainties on US sectoral returns differ across different investment horizons and market conditions

Enduring relief or fleeting respite? Bitcoin as a hedge and safe haven for the US dollar

Can technology protect investors from extreme losses? This paper investigates the short- and long-run hedging and safe haven properties of Bitcoin for the US dollar over the period 2010–2023, incorporating the COVID-19-related market turmoil. Our findings reveal that (i) Bitcoin acts as a strong hedge for all US dollar currency pairs examined, (ii) Bitcoin functions as a weak safe haven for the US dollar at short investment horizons, as indicated by a limited relationship during acute negative price movements, (iii) Bitcoin, instead of acting as a safe haven may, instead, increase aggregate risk at long horizons during periods of extreme losses. The analysis, performed using a series of horizon-dependent econometric tests, provides evidence of some US dollar risk-reduction benefits from Bitcoin but limited potential for enduring relief from long-run extreme negative US dollar rate movements.

Connectedness across meme assets and sectoral markets: Determinants and portfolio management

This study examines the dynamic connectedness and risk spillovers between meme coins, meme stocks, and sectoral markets under different investment horizons. Further, we explore the effects of global uncertainty and risk factors on patterns of dynamic connectedness as well as the benefits of portfolio diversification under different investment strategies. Empirical results indicate that the short-, medium-, and long-term connectedness among these markets are time-varying and are highly responsive to external shocks and stress periods, with the short-term spillover dominating both medium- and long-term spillovers. Furthermore, Meme stocks and coins are net receivers of shock, along with the energy, communication services, utilities, and real estate sectors, whereas other sectors are net transmitters. On the contrary, GameStop-GME becomes net shock transmitters in the medium and long run, while Shiba Inu is a net shock transmitter in the long run. We also show that Meme stocks and Meme coins have distinct features and characteristics from the sectoral markets. They are disconnected and minimally affected by the fluctuations in the sectoral market. Finally, empirical findings show that global risk factors reduce dynamic connectedness across time horizons. These results have several implications for investors, portfolio managers, and policymakers regarding investment strategies, asset allocation, and risk management.

Does constant asset allocation dominate buy-and-hold?

There is a widespread perception that it is optimal to keep portfolio weights constant over time, and that the optimal rebalancing frequency is just a question of the transaction cost. This is not generally true. We show that buy-and-hold is not stochastically dominated by any constant allocation strategy. Thus, there are some risk averters, including those requiring a minimal subsistence level, who are better-off with a buy-and-hold strategy when returns are i.i.d, even when rebalancing is free. Perhaps surprisingly, the longer the investment horizon, the larger the set of investors who prefer buy-and-hold over constant allocation.