Market Portfolio Research Articles

Analyzing the Relationship between the Features of Direct Real Estate Assets and Their Corresponding Australian—REITs

This study investigated the relationship between a sector-specific Australian Real Estate Investment Trust (A-REITs) and the underlying property assets in its property portfolio. The existing studies have assessed the connectedness/correlation between the A-REITs market and a variety of other asset markets, including the overall stock, bond, and direct real estate markets. This study applied regression analysis methods and discovered that there exists a certain degree of linear correlation between the underlying property assets and the return of the subject A-REITs. The most significant variable is the occupancy of the offices. The higher the occupancy is, the better the dividend can be. Features of the A-REITs also affect the dividend outcomes, specifically, the total portfolio market value and the capitalization rate. This suggests that the annual valuation outcomes show a positive relation with the performance of the A-REITs.

EVALUATION OF PERFORMANCE OF SELECTED INDIAN ESG FUNDS

ESG is a buzz word nowadays and gaining popularity day by day. It is claimed that these funds help in achieving sustainable growth and investors should select these funds as an alternative to the traditional mutual funds to achieve their long-term goals. India lags behind the leading countries such as USA and UK in terms of number of ESG schemes but these funds are gaining momentum in India though at a slow pace. This sector has not been fully explored in India and is expected to provide good returns in the years to come. Present paper attempts to investigate various issues related to these funds which are still unresolved. Some of these issues are—growth in the selected ESG funds, analysis of performance of selected ESG funds on the basis of different parameters, analysis of interdependence of ESG funds and analysis of response of ESG funds to the shocks. Based on the results, study shows that ESG funds outperform the market portfolio in the selected period.

Measuring the effectiveness of ASEAN-5 initiatives from emerging market portfolio’s perspective

ASEAN nations started ASEAN Economic Community (AEC) initiatives, with the goal of improving the economic movement in ASEAN. The initiative is expected to lead to higher integration in the regions. The objective of this research was to study the integration of equity markets in the ASEAN-5 nations (Indonesia, Malaysia, Singapore, Thailand, and the Philippines), particularly those involving the Indonesian stock market (Indonesia’s economy is the largest in the region), and to analyze the diversification opportunities among ASEAN equity exchanges. Theoretically, capital markets in these nations should be more integrated following the introduction of AEC due to the integration of their economy and removal of several investment restrictions, including foreign ownership limitation. The data used was weekly data was used from January 2000 to June 2019, which was divided into four periods: pre-crisis, crisis, post-crisis and AEC. The methods used were DCC-GARCH, AG-DCC, volatility spillovers, Granger causality and diversification ratio from the mean-variance framework. The results showed robust evidence that there were still less integrated equity markets in ASEAN-5. The volatility spillover declined during the post-crisis period and was relatively stable during the AEC period. This result implies that ASEAN-5 initiatives have an impact on the capital markets. However, the implementation of the AEC is still far from successful since the equity exchanges have become less integrated than in the post-crisis period. Investors in Malaysia, Singapore, and the Philippines are encouraged to avoid investing heavily in Indonesia and Thailand equities during market turmoil since both are net contributors to volatility.

Optimal contracts and asset prices in a continuous-time delegated portfolio management problem

<p style='text-indent:20px;'>We study optimal contracts and asset prices in a financial market in which an investor delegates a portfolio manager to manage her wealth. The agency frictions are caused by the manager's "shirking" action and hidden effort. The shirking action converts part of the return of the managed portfolio into the manager's income without reducing his utility. The manager's effort improves the return of the portfolio but reduces the manager's utility. We illustrate this dynamic principal-agent problem under hidden effort and observable effort, respectively. When the effort is hidden, to alleviate the impact of moral hazard, the investor pays more for the manager's performance and always keeps the optimal contract related to the returns of the manager's portfolio and market portfolio, and their quadratic (co)variations. When the manager's effort is observable, the optimal contract is related to the return of the market portfolio if the agency friction caused by the shirking action is serious, but is only related to the return of the manager's portfolio if shirking is not serious. Analysing the expected utility of the manager, we find that he has a disposition to hide information about effort to pursue a higher expected utility.</p>

US structural drivers of international portfolio returns

This paper examines the dynamic relationships between the global six Fama–French and momentum factors and three types of shocks from the US: growth, monetary policy, and risk premium shocks. Cross-sectional tests suggest that the US shocks capture a significant portion of the six factors’ explanatory power. Investigating the dynamic relationships, we find that although the market portfolio and small-minus-big style appreciate in value in response to positive growth shocks, the remaining factors—high-minus-low, conservative-minus-aggressive, robust-minus-weak, and winning-minus-losing—are not responsive or respond positively to the negative shocks. Internationally, the factors can respond heterogeneously to the same shock. By mapping risks to returns, our work paves the way for a detailed exploration of the structural drivers of excess equity returns.

Integrating Information Implied by Option Prices, Market Portfolio and Historical Data in Portfolio Selection

Integrating Information Implied by Option Prices, Market Portfolio and Historical Data in Portfolio Selection

Narrative-Managed Market Portfolio

Narrative-Managed Market Portfolio

Price spillovers between foreign exchange rate markets in Asean countries: Evidence from Covid-19 crisis and Russia-Ukraine war

This study aims to evaluate the spillover effects between the foreign exchange rate markets of ASEAN-5 countries (Indonesia, Malaysia, Singapore, Thailand, and Vietnam) using the spillover index proposed by Diebold and Yilmaz (2014). The results indicate that price spillovers between exchange rate markets are relatively low and tend to increase during recent crises, including COVID-19 and the Russia-Ukraine war. This implies that crises have caused price contagion effects. Due to their reliance on the markets in Vietnam, Singapore, and Malaysia, the forex markets in Indonesia and Thailand will not be viewed as safe havens to hedge. These spillover effects reveal that price shocks significantly impact the ASEAN-5 markets, which means that there is a contagion risk in the currency markets. These findings have crucial implications for investors and policymakers dealing with currency markets, such as predicting portfolio market risk and identifying the existence of the diversification benefits of exchange rate markets.

ESG 등급 변화를 이용한 책임투자전략 연구

Purpose - The purpose of this study was to examine the impact of ESG rating changes of companies listed in Korean Stock Exchange on stock returns.
 Design/methodology/approach - This study collected prices and ESG ratings of all the companies listed on the Korea Composite Stock Price Index. Based on yearly change of ESG ratings we grouped companies as 2 portfolios(upgrade and downgrade) and calculated portfolios’ return.
 Findings - First, the difference in returns between upgraded and downgraded portfolios is small and statistically insignificant. Second, however, in the COVID-19 period (2020 ~ 2021), the upgraded portfolio outperforms the downgraded portfolio by 0.7 percentage points per month. The difference in returns between upgraded and downgraded portfolios is statistically significant after controlling for the Carhart four factors. Lastly, there are much higher volatility when the ESG rating changes are made of companies with low levels of ESG ratings.
 Research implications or Originality This study is the first to examine the impact of ESG rating changes on stock returns in Korea. Furthermore, the findings can serve as a reference for managers who want to control a firm's risk by ESG rating changes. Practically, asset managers can use the findings to construct portfolios that are less risky or more profitable than the market portfolio.

Methodology for Constructing an Experimental Investment Strategy Formed in Crisis Conditions

This article proposes a neoclassical stock market portfolio based on the principles of dynamic response and constant adaptation to the market. The construction of a neoclassical investment portfolio begins with the conceptual development of an adaptive investment strategy. We suggest an algorithm for creating an adaptive investment portfolio. The conceptual model of the investment strategy is presented including the following mandatory components: evaluation, forecasting, investment, and adaptation. This model has the ability to adapt both in normal and in crisis periods of the market. As a description of the forecasting component, an additive mathematical model of the predictive ensemble is used, including seasonal, regression, and shock elements as well as a neural network.

The environmental policy of the Norwegian Government Pension Fund‐Global and investors' reaction over time

AbstractTaking the greatest socially responsible sovereign wealth fund in the world, namely, the Norwegian Government Pension Fund‐Global (GPF‐G), as a proxy for the world market portfolio, and collecting investment data from 2006 to 2021, our research studies how the attitude of environmentally concerned investors has changed, on different markets, over time, particularly before and after the 2015 Paris Climate Agreement. We investigate, with an event study methodology, what happens to stock prices when companies are excluded from the GPF‐G portfolio for serious environmental violations, unacceptable level of greenhouse gas emissions, or for their involvement in thermal coal processing. In line with previous studies, our results show that Paris Agreement has acted as a catalyst for environmentally conscious behavior by international investors, and this is particularly true in Anglo‐Saxon countries. Especially US, Japanese, Chilean, Indian, and Canadian investors care about the environmental issues that have led to the exclusion from the fund investment portfolio. To the contrary, investors in China, Germany, Australia, and UK seem to have an opposite reaction, as the prices of the excluded stocks increase.

Portfolios under Different Methods and Scenarios: A Case of Fiji’s South Pacific Stock Exchange

In this study, we analyze portfolio performance under different methods and scenarios for the small island economy of Fiji. In addition to documenting the historical performance and the smallness of the stock market, the study looks at the possibility of opting for an equally weighted (naïve) portfolio against market and minimum variance portfolios. To this end, we extract monthly stock price data of 17/19 listed companies from August 2019 to July 2022 and invoke different approaches to develop portfolios under different scenarios. We consider the mean-variance, minimum variance, semi-variance, utility maximization, and minimum turbulence portfolios, based on beta-adjusted (CAPM-based) returns. The different portfolios presented in the study should provide some insights on asset allocation in Fiji’s stock market. Interestingly, unlike average returns, the beta-adjusted returns indicate that an equally weighted portfolio can yield relatively higher expected returns than market portfolios, although, with a relatively higher standard deviation and lower Sharpe ratio than the optimized results. In a semi-variance analysis (where we account for downside risk only), equally weighted portfolio yields superior returns, albeit with a relatively lower Sortino ratio. Given that Fiji’s stock market is currently a small, with a relatively small number of listed companies, potential and less sophisticated investors and analysts considering portfolios based on beta-adjusted returns, may simply opt for 1/N (naïve) portfolios as a diversification strategy while realizing decent expected returns. The optimized portfolio under mean-variance, semi-variance, and utility are presented as alternative considerations for nuanced investors. Additionally, equally weighted turbulence-adjusted and minimum-turbulence portfolios are constructed to capture periods of unusualness and calmness in the market. The methodologies and the results presented can be adjusted and applied to other small markets and hence can influence investment decisions of investors in creating diversified portfolios under different scenarios.

The impact of the Russia-Ukraine war on European energy stock prices

The world economy is developing to a new level with more challenges and more opportunities. However, the war between Russia and Ukraine has brought the world's energy resources into a tough situation. In this essay, we are going to set UK’s stock market as an example, to discuss since the war began in February 2022, the influence that brought to the European energy stock prices. We found two empirical results from the model. First, the positive correlation is existed between the excess return of energy stocks and the excess return of the market portfolio and the return of oil prices; Second, the Industrial production index and energy price CPI have no conspicuous influence on the returns of energy stocks. The results in this paper may benefit some relevant investors in the financial markets.

Preferential corporate income tax treatment: Valuation in the market portfolio

AbstractIn the setting of the market portfolio, the impacts of preferential corporate income tax treatments through the valuational reduction for risk are opposite to and offset the impacts through the expected proceeds. This suggests that focusing on the absolute valuation of tax‐favored firms results in the undermeasurement of implicit taxes on returns on investments in tax‐favored firms and the relative valuation with reference to fully taxed (i.e., tax‐disfavored) benchmark firms be used. In addition, corporate income taxes imposed on entities and capital income taxes imposed on investors have opposite valuational effects through the endogenously derived market‐aggregate aversion to risk.

Machine learning for cryptocurrency market prediction and trading

We employ and analyze various machine learning models for daily cryptocurrency market prediction and trading. We train the models to predict binary relative daily market movements of the 100 largest cryptocurrencies. Our results show that all employed models make statistically viable predictions, whereby the average accuracy values calculated on all cryptocurrencies range from 52.9% to 54.1%. These accuracy values increase to a range from 57.5% to 59.5% when calculated on the subset of predictions with the 10% highest model confidences per class and day. We find that a long-short portfolio strategy based on the predictions of the employed LSTM and GRU ensemble models yields an annualized out-of-sample Sharpe ratio after transaction costs of 3.23 and 3.12, respectively. In comparison, the buy-and-hold benchmark market portfolio strategy only yields a Sharpe ratio of 1.33. These results indicate a challenge to weak form cryptocurrency market efficiency, albeit the influence of certain limits to arbitrage cannot be entirely ruled out.

Türkiye’de Sürdürülebilir Temalı Fonların Geleneksel Fonlarla Karşılaştırmalı Performans Analizi

Sustainable finance aims to contribute to the development of an environmentally and socially sensitive production approach of economic activity in order to leave a more livable world to future generations with an environmental and social investment approach. It increases the importance of comparing the performances of sustainable-themed funds with traditional themed funds, for investors to consider investing with a socially responsible investment approach. In this study, the performances of sustainable-themed funds with traditional funds and indices in Turkey were analyzed comparatively. BIST Sustainable index (XUSRD) as the market index of sustainable funds; the BIST100 index (XU100) was chosen as the market index of traditional funds. Since the history of sustainable funds in Turkey is not very old, daily data for the years 2019-2022 were analyzed as the data period. In the study, firstly, the performances of the funds were compared with annual return, standard error, Sharpe ratio, Jensen's alpha and Treyner criterion. Then XU100 and XUSRD were selected as the market portfolio, and the returns and systemic risks of the portfolios were obtained with the Capital Asset Pricing Model (CAPM). According to the results obtained from the study, it has been observed that the performance of sustainable themed funds is better than their traditional substitutes and market indices.

RISK, RETURN AND INTERNATIONAL PORTFOLIO DIVERSIFICATION: K-MEANS CLUSTERING DATA

The work is devoted to the study of the international investment portfolio, its features such as risk, profitability and the level of international diversification, as well as global flows of portfolio investments. The methodology of the work is as follows. The paper develops k-means clustering model to study the patterns of global portfolio investment flows and equity markets. The model groups 30 developed and emerging stock markets according to three variables: return, risk and the level of international diversification. Thus, the main purpose of this paper is to investigate different stock markets on a global scale through an in-depth analysis of the respective market portfolios and their measures of risk, return and international diversification, as well as their interrelationships. The researcher develops and builds the model in such a way as to either confirm or refute the hypotheses put forward. The results of the study demonstrate the following results, which present opportunities for further research. The study supports the hypothesis that portfolios of investors from developed stock markets have a better level of international diversification than portfolios of investors from emerging stock markets. However, there is high within-group variation in the levels of international diversification among developed markets. There are three groups of developed markets based on the level of international diversification of investors in their respective markets: low-level markets (ca. 22%); mid-level markets (43%); and high-level markets (ca. 61%), while emerging markets are generally more heterogeneous. The hypothesis that stock markets that are domestic to investors with higher levels of international diversification have higher rates of return and lower rates of risk has not been confirmed. In general, developed stock markets are characterized by higher returns and international diversification with lower risk ratios. Nevertheless, the higher level of international diversification in developed market portfolios is not always accompanied by better stock performance. The best risk-return ratio (return – 0.46%, risk – 5.56%) is observed for markets from the cluster with an average level of international diversification. While the markets in the cluster with the highest level of international diversification have unreasonably high-risk ratios, which are not compensated by better returns. Markets in the cluster with lower levels of international diversification have unreasonably low rates of return that are not accompanied by correspondingly lower risks.

Performance Evaluation, Managerial Hedging, and Contract Termination

We develop a dynamic model where a principal contracts with an agent to operate a firm. The agent, protected by limited liability, trades privately a market portfolio to hedge market risk in his compensation. When liquidation cost of the firm is proportional to its size, the principal manages the termination risk by loading the contract with a positive market component, which alleviates termination risk in normal market conditions but makes termination more likely after negative market shocks. The optimal contract displays a dynamic mixture of absolute and relative performance evaluations and is implemented using a dynamic deferred compensation account. This paper was accepted by Agostino Capponi, finance. Funding: Y. Huang acknowledges financial support from the Shanghai Institute of International Finance and Economics and Fudan University [Gao Feng Project]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4533 .

Practical Applications of Emerging Market Diversification Benefits: Stock Funds versus Currency Funds

1. Leonard L. Lundstrum 1. is a professor of finance in the College of Business at Northern Illinois University in DeKalb, IL. (llundstrum{at}niu.edu) In [ Emerging Market Diversification Benefits: Stock Funds versus Currency Funds ][1], from the Fall 2021 issue of The Journal of Wealth Management , Leonard Lundstrum of the College of Business at Northern Illinois University analyzes an investable emerging market currency strategy. He concludes that adding an emerging market currency fund to an otherwise well- diversified developed market portfolio adds an incremental diversification benefit. Adding emerging market equities to the same portfolio fails to achieve a similar benefit. [1]: https://doi.org/10.3905/jwm.2021.1.140

Bond Market Development in Bangladesh: Prospects, Challenges and Required Actions

Purpose – The purpose of this study is to focus on the present scenario of the bond market in Bangladesh and to explore prospects, challenges, and required actions to expand the market to support the growing economy and make it compatible globally. Design/methodology/approach – The qualitative research method is used for collecting and analyzing secondary data from different journals, news articles, working papers, conference papers, regulatory reports, etc. to focus on the existing bond market of Bangladesh and to find out challenges and scope for further development while recommending required actions through narrative inquiry. Findings – The bond market in this country is in a very niche phase compared to the global bond market as well as the Asian bond market, though the economy is booming. The bond market of our country is dominated by government debt securities rather than corporate debt securities. As of 2021, Bangladesh's bond market size stands at $18 billion compared to the global bond market size of $124 trillion. And compared to some East Asian and South Asian countries, the bond market size of Bangladesh is very low through percentage analysis of GDP. Study limitations – Only secondary data is evaluated and scrutinized for this study. Practical implications – For Bangladesh, the creation of the debt market is essential to build an efficient and compatible capital market. Other than the equity market, various financing vehicles need to be created and different financing modes need to be opened by the government or any other public and private concern for the development of mega infrastructural projects. Nowadays, to minimize the budget shortfall to undertake such mega projects, borrowing from the banking sector becomes essential. On the other hand, this market would also create an opportunity for investors as an alternative investment vehicle. Originality/value – This study focused on the current bond market scenario in Bangladesh and showed a comparative analysis of the bond market portfolio of our country with developed countries and other developing countries. The prospects and challenges of expanding the existing bond market and required future actions to build an effective bond market in Bangladesh are also recommended in this study.