Professional Investors Research Articles

Uncertainty, Fear and Herding Behavior: Evidence from Size-Ranked Portfolios

This study is aimed at testing the relationship between investors’ uncertainty reflected by market sentiment and herding behavior phenomenon. Using data for 1990–2019 for size-ranked portfolios, the evidence documented here indicates that herding is strongly related to market sentiment as captured by the CBOE’s Volatility Index, the VIX. The results indicate that the VIX, which is also recognized as the fear index, has a substantial impact on herding across all groups and subgroups of size-ranked portfolios. Overall, the effect of VIX exists in most of the quantiles of the cross-sectional absolute deviation distribution. In this context, the scale and magnitude of the fear index impact rises toward the highest parts of the herding distribution. We also show that herding behavior is more pronounced when the market is overwhelmed by sentiment. The findings have several practical implications for investment professionals such as portfolio managers, investment officers, analysts, and other market participants. They also provide academic insights for researchers dealing with market efficiency and investors’ behavior.

Co-movement of COVID-19 and Bitcoin: Evidence from wavelet coherence analysis

We apply wavelet methods to daily data of COVID-19 world deaths and daily Bitcoin prices from 31th December 2019 to 29th April 2020. We find, especially for the period post April 5, that levels of COVID-19 caused a rise in Bitcoin prices. We contribute to the fast-growing body of work on the financial impacts of COVID-19, as well as to ongoing consideration of whether Bitcoin is a safe haven investment. Our results should be of great interest to both scholars and policy makers, as well as investment professionals interested in the financial implications of both COVID-19 and cryptocurrencies.

Bitcoin and Portfolio Diversification: Portfolio Optimization Approach

The fundamental objective of portfolio diversification is to construct a portfolio of uncorrelated or mildly correlated assets so as to maximize the risk-adjusted returns on a portfolio. Portfolio Optimization is one of the techniques used by investment professionals to explore the potential of different assets in maximizing the risk-adjusted returns of the portfolio by adjusting the weight of each asset using simulations or constrained scenarios. A significant amount of research has already been conducted in the area of portfolio diversification that helps investors in devising their investment strategies and policies. Cryptocurrencies in general, and Bitcoin in particular, have aroused significant interest among investment professionals, policymakers, and regulators alike. Although much research has primarily focused on the legal and technological aspects of Bitcoin, the examination of other financial, diversification, hedge, and safe-haven aspects of Bitcoin has not progressed as far. This study explores the potential of Bitcoin as an alternative asset, and its potential in portfolio diversification, by using the portfolio optimization approach. The study employs the portfolio optimization approach under multiple constraining scenarios to evaluate the effectiveness of Bitcoin in portfolio diversification. A Monte-Carlo Simulation approach is then employed to evaluate the outcomes under each scenario by randomizing the outcomes of portfolio optimization. This study suggests that Bitcoin, due to its exotic nature, unwavering appeal, and unknown set of drivers, could at best act as a diversifier rather than a hedge or a safe-haven.

Can Alumni Relations between Fund Managers and Companies’ Management Exacerbate the Stock Price Volatility?

The private information trading between fund managers and listed companies’ executives based on alumni relations may avoid fair disclosure principal and aggravate stock price volatility. In the capital market, alumni relations have been reduced to a profit-making tool for some fund managers. Therefore, it is of great practical significance to systematically analyze and discuss how alumni relations affect information disclosure and stock price fluctuations of listed companies. This paper systematically examines the adverse impact of the alumni relations between fund managers and listed companies’ executives on information disclosure and stock price stability in the capital market. Taking the quarterly data of China Open-end Fund Portfolio from 2003 to 2016 as the research sample, this paper finds that private information trading between fund managers and listed companies’ executives based on alumni relations would increase the information gap between different investors and exacerbate stock price volatility. Further analysis finds that the existence of alumni relations would lead to short-termism of fund managers. For example, the holding period would be much shorter, the turnover rate would be much higher and professional investors without alumni relations would be crowded out. These results show that the alumni relations between fund managers and listed companies’ executives would adversely affect the stability of the capital market. This paper also finds that private information trading between fund managers and listed companies’ executives based on alumni relations is mainly reflected in the trading of good news. Taking listed companies’ earnings announcement as a shock, we find that fund managers would significantly change their shareholding position before listed companies’ announcement of financial reports. If the profit of this year is bigger than the previous year （good news）, then fund managers would increase their holding of the stock. Further analysis indicates that the significant impact of alumni relations on private information trading and stock price fluctuations is only established in the sub-sample of good news. The above results show that the private information trading between fund managers and listed companies’ executives based on alumni relations is mainly reflected in the trading of good news, which also leads to particularly violent price fluctuations in these stocks. This paper indicates that if we cannot eliminate the influence of private information trading between fund managers and listed companies’ executives based on alumni relations, we cannot guarantee the effective implementation of fair information disclosure. These findings may provide some enlightening significance for the supervision work of the CSRC and related government agencies.

How Do Whitepaper Disclosures Influence Investors’ Decisions? Evidence from Initial Coin Offerings

This study investigates the influence of voluntary, unverifiable disclosures on investors’ decisions and their risk perception. We focus on Initial Coin Offerings (ICOs), in which start-ups and projects raise funds by issuing their own crypto tokens. Based on voluntary, unverifiable disclosure provided in whitepapers, ICOs have raised $23 billion by the end of 2018. Using a hand-collected sample of 558 ICOs, we find that more whitepaper disclosure increases the share of professional funds in an ICO’s funding volume and the likelihood of professional investors participating in an ICO, while it decreases token underpricing. Further analyses indicate that particularly the disclosure of team and financial characteristics influences professional investor participation and token underpricing. We also document that the threat of regulation increases the amount of disclosure provided by ICO projects.

Two’s a company, three’s a crowd: Deal breaker terms in equity crowdfunding for prospective venture capital

Crowd-based means of funding are emerging as a valid novel way of providing scarce seed-finance for entrepreneurial ventures. In recent years, securities-based variants such as equity crowdfunding or initial coin offerings (ICOs) are increasingly attracting higher funding amounts than reward-based models, in particular for commercially oriented ventures. However, securities-based crowdfundings also come along with the more complex contracts, since they introduce a large set of new shareholders in the firm, possibly with voting, information, and cash-flow rights. This might have implications for the ownership structure and future governance of a company, and in turn influence the evaluations by prospective investors. This paper is concerned with exploring potential knockout criteria in securities-based crowdfunding contracts and to what degree they serve as a deal breaker for the investment decision of subsequent professional venture investors. Using an explorative mixed methods approach, we find empirical evidence that, e.g., an inflated capitalization table owing to crowd investors holding direct securities in a company, redemption and voting rights by the crowd, as well as the non-existence of a drag-along clause, lead venture capitalists and business angels to refrain from an investment in an otherwise attractive but such-funded start-up firm. We conclude that contractual frictions play a decisive role in whether entrepreneurs can combine crowd-based means of funding with traditional forms of venture financing. Theoretical and managerial implications are discussed.

The Bargaining and Contagion Effects of Investors in Single Family Residential Properties: The Case of Denver Colorado

We study the bargaining power of investors and the contagion effects of investor-owned single family homes on nearby property values. By controlling for the characteristics of both buyers and sellers, we find that investors tend to have more bargaining power than owner-occupiers — they purchase at lower prices and sell at higher prices, all else equal. We identify two types of investors: Professional Investors (e.g., corporations and partnerships) and Individual Investors. We find differences in the behavior of these two types of investors. For example, Individual Investors tend to invest in homes similar in terms of unobserved quality to those purchased by owner- occupiers. The tendency to buy lower quality homes is primarily attributable to Professional Investors. We also find that Professional Investors have more bargaining power than Individual Investors. For the contagion analysis, we use a repeat sales methodology and find that increasing ownership by investors in a neighborhood is associated with a small positive effect on nearby property values.

How attractive are municipal bonds for the passive competitiveness: the case of immunization of municipal bonds

Purpose This paper study regional attractiveness through passive portfolio investment based on duration, immunization and convexity (in case of higher interest rate volatility) of municipal bonds by using data from Standard and Poor’s. The massive variety of financial incentives to promote regional investment attractiveness is dependent on governmental strategy. Municipal bonds are the one of the most efficient ways of direct investments in the region, however, it is still a question of a good balance between a certain rate of return and an adequate risk. The purpose of this paper is to analyze the investment opportunities in municipal revenue bonds. Design/methodology/approach This study developed a model of investing using municipal bonds with the case of their immunization and analyze attractiveness of such investment. The theoretical model assumes a situation where the local government finances its capital projects through municipal revenue bonds. Such situations influence strongly on regional or local competitiveness provided by local government policy. Findings An analysis of the municipal bond market indicates that both municipal general and revenue bonds had stable and good level of yields to maturity in the past ten years. Their standard deviations were very low and in the past two years almost approached the level of standard deviations of treasury bonds. With the duration of 4–6 years on 5-year investment in municipal revenue bonds and their immunization, it is possible to provide good returns for investor. Research limitations/implications The limitation of this study concerns theoretical situation where local government will use non-market-based policy to reduce the interest rates and that will influence on rise of municipal bond liquidity premium (price distortion). This situation will make municipality bonds less attractive for investing, especially because of lower liquidity on secondary market. Also, this model is applicable in regions that have developed financial markets. Practical implications This research suggests governments a sustainable framework to use municipal bonds as a strategy for capital targeting in regions. Social implications This research is related to professional investors’ strategy with projects that have the highest investment potential; this is good way for an adequate allocation of resources (regional competitiveness). Originality/value This paper analyzes very rare subject involving local government strategy of finance and portfolio investment in municipal bonds. There is a huge gap in the literature on this issue. Also, this study provides the model that can be used as a case for higher local competitiveness.

The impact of renewable on-site energy production on property values

PurposeContrary to the traditional technology project perspective, real estate investors see building-specific renewable energy (on-site energy) investments as part of the property and as something affecting the property’s ability to produce a (net) cash flow. This paper aims to show the value-influencing mechanism of on-site energy production from a professional property investors’ perspective.Design/methodology/approachThe value-influencing mechanism is presented with a case study of a prime logistics property located in the Helsinki metropolitan area, Finland. The case study results are compared with the results of a survey answered by over 70 property valuation professionals in the Finnish real estate market.FindingsCurrent valuation practice supports the presented value-creation mechanism based on the capitalisation of the savings generated by a building’s own energy production. Valuation professionals see benefits beyond decreased operating expenses such as enhanced image and better saleability. However, valuers acted more conservatively than expected when transferring these additional benefits to the cash flows of the case property.Practical implicationsBecause the savings in operating expenses can be capitalised into the property value, property investors should consider on-site energy production when the return of on-site energy exceeds the return of the property. This enhances the profitability of on-site energy, especially in urban areas with low initial yields.Originality/valueThis is the first research paper to open the value-influencing mechanism of on-site energy production from a professional property investors’ perspective in commercial properties and to confirm it from a market study.

Advisors as Fiduciaries

This Article provides the first sustained account of advice-giving as a fiduciary activity, and it demonstrates that the dominant approach to defining fiduciary relationships is flawed. Leading academic commentators assert that fiduciary relationships only arise when one party has discretion over the assets or affairs of another. Yet, many advisors — such as lawyers, doctors, and investment professionals — lack discretion over a principal’s assets or affairs, but are nonetheless considered fiduciaries by the courts. The dominant academic view of fiduciary relationships is therefore incomplete because it does not account for purely advisory relationships. Drawing on the interdisciplinary literature on trust and the normativity of advice, the Article demonstrates that imposing a fiduciary duty on certain advisors is not only consistent with contemporary judicial practice, it is also normatively correct. In addition, the Article builds a framework for assessing which advisors should be subject to fiduciary responsibility. Not everyone who provides advice should be subject to fiduciary liability. Thus, the Article proposes factors to determine which advisors should be subject to fiduciary duties. The Article addresses a matter of widespread importance. Most people rely on fiduciary advisors to aid with critical decision-making. Yet, the dominant academic approach would wrongly denude these advisors of fiduciary responsibility merely because they lack discretionary authority over their clients’ assets or affairs. This result would have adverse consequences for the advisory relationships on which most people rely.

Penalties for Unexpected Behavior: Double Standards for Women in Finance

ABSTRACT We present 179 investment professionals with a scenario that manipulates whether a male or female analyst persists in pitching a stock pick after it has been voted down. Respondents evaluate analysts as less promotable when they do not persist, but only if the analyst is female. Results are consistent with categorization theory, which suggests that evaluators rely on stereotypes to interpret unexpected behaviors. In male-dominated settings, the same unexpected behavior may be perceived as evidence of a “lack of fit” in evaluations of women, but nondiagnostic in evaluations of men. Analysis of free-response questions confirm that the unexpected behavior was a predominant focus in performance evaluations of women, but not for men. Semi-structured interviews with 13 senior investment professionals provide additional support for the role of expectations and categorization heuristics on promotion decisions. Our findings shed light on factors that may contribute to the investment industry's “leaky pipeline” for women. JEL Classifications: M40; M41; M49; M51. Data Availability: Contact the authors.

Normal Return Gaps: Dispersion Illuminates Diversification

Despite ever more sophisticated risk management and measurement, investment professionals have generally overlooked a simple but powerful measure of relative performance and portfolio diversification—the normal return gap. The authors develop a generalized specification of the expected difference in returns between two investments based on the folded normal distribution. Even highly correlated investments can have quite large expected return gaps. They then demonstrate the applicability of this dispersion to capital market forecasts, manager selection, performance evaluation, style tilts, sector bets, socially responsible investing, manager combinations, wash sale taxation, and rebalancing. TOPICS:Performance measurement, wealth management, manager selection, ESG investing Key Findings • Even highly correlated investments can produce meaningful diversification; conversely, low correlations can produce small return gaps and, therefore, minimal diversification. • Normal return gaps between investments are often the same magnitude as the expected returns of the underlying assets. • Investors unaware of normal return gaps risk terminating worthy managers; establishing competitive “horse races” between managers is particularly unwise.

Practical Applications of Active Indexing with ETFs: Disruption and Implications

Practical Applications Summary In Active Indexing with ETFs: Disruption and Implications, from the Summer 2019 issue of The Journal of Index Investing, Joanne M. Hill of CboeVest discusses how exchange-traded funds (ETFs) have revolutionized the asset management, trading, and exchange businesses, and how investment professionals should respond. According to Hill, the proliferation, transparency, and cost/performance benefit of ETFs give investors greater choice, ease, and value. But at the same time, their wide availability and use of quantitative rules-based strategies are disrupting traditional asset management. Hill asserts that the strong relative performance of ETFs is causing investors to increasingly eschew traditional discretionary money management based on qualitative stock selection. Additionally, index firms—which provide the benchmarks for ETFs—are gaining influence in the development and marketing of investment products. Hill argues that the move toward rules-based, smart-beta investing means active management via ETF indexing will become more common as a trading strategy and in portfolio management, presenting a challenge to asset managers and financial markets. She advises ETF sponsors to apply new approaches to the content, marketing, and distribution of their products, and to train their sales forces to capably inform customers about all aspects of ETFs. TOPICS:Exchange-traded funds and applications, passive strategies, mutual fund performance

Stock Market Liquidity and Monetary Policy

Purpose: This article investigates the deterministic relationship between monetary policy and stock market liquidity in South Africa. Design/Methodology/Approach: The Ordinary Least Square Method was used to capture the nexus between the Johannesburg Stock Exchange indices and selected liquidity measures over the period of 2002 to 2019. The liquidity measures chosen were multi-dimensional in nature, exhibiting characteristics such as tightness, immediacy, depth, breadth and resiliency. Findings: Empirical evidence shows that liquidity depend on monetary policy adjustments as the results reveal that liquidity is dependent on changes in South African Benchmark overnight rate (SABOR). The strength and significance of the relationship depended on the indices and period of analysis. The liquidity measure used was also influential as the results showed a negative relationship between SABOR and adjusted illiquidity measure in line with theory. Also, in line with theory effective spread was found to be positively related with SABOR. The relationship conflicted the theory on the trading volume as it was positively related to SABOR. However, the analysis could not confirm that the relationship between liquidity and monetary policy is asymmetric. Practical Implications: The article highlights the fact that stock market investment professionals, traders and regulators should account for the effects of changes in interest rates when modeling market frictions like liquidity. Originality/Value: An investigation was done in an emerging equity market which is different from the dynamics and mechanics of the developed equity markets because the emerging stock markets are illiquid and constitute a lot of market imperfections. Furthermore, developing countries’ financial markets are extremely segmented and less efficient. The results revealed important insights that stock liquidity is time variant and index dependent and contrary to many studies the relationship between stock liquidity and monetary policy is not asymmetry.

A Review of the Impact of Green Building Certification on the Cash Flows and Values of Commercial Properties

This study aims to review empirical research concerning the impact of green certificates on property cash flows and values, particularly from professional property investors’ perspective. The study uses discounted cash flows (DCF), a widely used property valuation method in income-generating properties, as a methodological framework. In this study, over 70 peer-reviewed studies were identified, categorized, and analyzed in the DCF framework. The reviewed studies indicated that certificates might increase the rental income and decrease the operating expenses, vacancy, and risks of a property. Together with the brand value of certificates, these enhancements should lead to an increase in property value. The number of studies has grown rapidly during the 2010s. Lately, studies have developed from asset-level to portfolio-level examinations. Although the reviewed studies found certification to be beneficial, the range of reported benefits was wide, and over half of the studies concentrated on U.S. commercial real estate markets, with a strong focus on LEED and ENERGY STAR certificates. From a property valuation perspective, applying these results to other markets and certificates might be challenging. Property values that fully reflect the environmental performance of properties would be a key to motivate mainstream investors to adopt sustainable property features.

Behavioural Finance: a Literature

Behavioral finance is a systematic study of investors’ investments in the stock market, and various investments avenues are available in the market, every individual, professional investors, and financial service firm’s deal with different securities for maximization of profits and minimization of risk during the process, so many biases knowingly and unknowingly involved by the investors.

A Short Course in Options Pricing, Portfolio Management, and Trading

An option gives the right to buy or sell something in the future at a fixed price. The value of an option comes from price uncertainty: if the future price is high the option to buy at a fixed lower price is valuable. An option to sell at a fixed price hedges the risk that the price will go down. Option prices embed predictions about other prices. From a set of option prices it is possible to know the entire probability distribution of future prices for the underlying asset. We can know the (market) probability that the S&P will crash to 900 next year, or the probability that crude oil will be above $100 in 5 years time. If we disagree with these market probabilities we can construct option portfolios that bet against them. We can also bet on characteristics of the distribution. For example we might believe that the market underprices extreme events and so the tails of the market distribution are too small. Or that there is more downside risk than upside risk. Or anything else about the probability distribution of the future price. We can construct option portfolios to bet on these views. Options allows a more sophisticated type of investment. Usually investors will start with some view about the future price distribution of an asset. If the average of their expected distribution is greater than the forward price they think it's a good idea to buy. If it's less they sell. Maybe they make some adjustment for risk. This is almost always wrong. The optimal portfolio should start by comparing the investor's beliefs with the market predicted distribution. Almost always the optimal portfolio involves options. Investment without options is basically indefensible, but quite understandable. Option pricing uses complicated mathematics and is not accessible to most investors. Even professional investment managers will have a murky understanding of options pricing and basic option structures, but not enough to sensibly integrate them into a portfolio. This course attempts to give a reasonably sophisticated understanding of pricing and using options without the really tricky math. We develop the intuition of the pricing, but keep the focus on practicalities. The goal is to be able to construct and manage an option portfolio to express a view about the distribution of future prices.

Mantle of the Expert

In this article, Tim Taylor, a teacher and tutor for Mantle of the Expert, and Nicole Winter, a primary school teacher and course participant, discuss a long-form Mantle of the Expert course run by the National Education Union in 2018-2019. They conclude that, whilst the approach demands a lot from teachers in terms of professional judgement and investment, it has the potential to create a classroom ethos in which children are recognised as capable learners, invested in their own learning.

Cryptocurrencies: An Overview and Financial Analysis for Inquiring Investment Professionals

With the increase in media attention, public acceptance, and geopolitical tolerance of cryptocurrencies, it is becoming more important for investment professionals to develop an understanding of these new “digital assets”. Thus, this paper provides readers with an overview of the mechanics and utility for 3 of the most notable cryptocurrencies (BTC, XRP, and LTC) as defined by market capitalization and track record from two different vantage points: qualitatively and quantitatively. For the former, the author delves into use-cases and catalysts that could impact future adoption rates. For the latter, a financial performance and risk analysis is conducted in which the author analyzes possible return or diversification benefits imparted by a basket of cryptocurrencies in conjunction with a portfolio of traditional assets and alternative assets.

Behavioral insomnia in a pediatric sleep clinic: retrospective study

Background/Objective: Behavioral insomnia is a common sleep disorder among children, with potentially negative impact on health, behavior, and cognition. This study aimed to characterize a pediatric population referred to a Sleep Disorder Clinic of a tertiary hospital due to behavioral insomnia. Methods: Retrospective and descriptive study based on the review of medical records of patients with insomnia over an eight-year period (2008−2016). Results are presented as median (minimum-maximum), mean (standard deviation), and percentage. Results: A total of 964 children attended the Sleep Disorder Clinic in the considered time period, 162 (16.8%) of which due to insomnia and 137 (14.2%) to behavioral insomnia. Most children (58.4%) were male and the median age at referral was 45 months (5 months–18 years). The median bedtime was 10 pm (8 pm−4 am) and nocturnal awakenings were frequent, particularly in pre-school aged children. Regarding bedtime routines, 62% of children were not able to fall asleep alone, 48.9% had television in the bedroom, 43.1% (11.9% of which, teenagers) required an object to fall asleep, and 42.3% required lights on. Most patients (62%) had a routine to fall asleep, which was dependent on the caregiver in younger children and on television and reading in teenagers. The most frequent daytime symptoms were sleepiness in older children and irritability in younger children. Regarding treatment, 29.9% were taking drugs before referral. Conclusions: Most children in this study were preschoolers, an important age window. Later sleep time, TV in the bedroom, and parental dependence to fall asleep were frequent, revealing a broad area for intervention. The authors propose greater investment in training health professionals and caregivers working in the area, in order to promote the adoption of adequate sleep hygiene as a form of prevention.