Market Portfolio Research Articles

Exchange Rate Fluctuation and the Stock Return of Listed Multinational Companies in Sri Lanka

According to the availability of resources, countries make the choice between production, export, and import, and they usually attempt to gain competitive advantages through foreign trade activities. Thus, internationally active firms have to face the currency fluctuation risk frequently and disclose the foreign currency gains and losses during the year in their financial statements. Though the literature provides empirical evidence on the impact of exchange rate fluctuation on stock return in foreign countries, studies about the Sri Lankan context are limited. This study, following a quantitative research approach, investigates the relationship between the exchange rate fluctuation and the stock return based on secondary data from selected 31 listed multinational companies in Sri Lanka for the period from 2010 to 2020. ‘Exchange rate fluctuation’ and ‘stock return’ are measured using the change in the trade-weighted exchange rate, and stock prices plus dividends respectively. Market portfolio rate of return (MPRR) and inflation rate are used as control variables. By applying panel regression analysis, findings reveal a significant negative relationship between stock returns and trade-weighted exchange rate (TWER). However, control variables (MPRR and the inflation rate) show divergent results with the stock return. Accordingly, the market portfolio rate of return shows a significant positive relationship with the stock return. Contrary to MPRR, there is a significant negative relationship between inflation rate and stock return. Thus, as a fresh study conducted in the Sri Lankan context, these findings reveal that high variations in the exchange rate could lead to uncertain stock returns whereas increased exchange rates and inflations rates reduce firms’ market- based performance in terms of stock returns. These findings provide insights and directions towards introducing and regulating policies connected with the exchange rate to mitigate the abrupt impacts of exchange rate fluctuations on individual firms and the economy. Accordingly, the findings of this study would be beneficial for policymakers in taking policy decisions for promoting the international trade of the country while regulating exchange rate and monetary policies.

Exploring the nexus between Credit risk and Off-balance sheet activities of commercial banks: A case of an emerging Asian economy

This study's primary purpose is to examine the relationship between credit risk and off-balance-sheet activities at conventional and Islamic commercial banks in Malaysia. In order to investigate and achieve the research's objectives between 2010 and 2017, a diverse group of 25 banks was chosen. The category of commercial banks includes both conventional and Islamic banking systems. Fixed effect and GMM panel estimates, followed by a series of diagnostic tests, seemed to be the most appropriate methodologies for this inquiry. According to the findings of the Husman test, endogeneity was shown to exist. In this instance, Arellano-Bond tests for zero autocorrelation may be obtained from the work's GMM analysis. In addition to establishing that the concept of market portfolio theory is accurate, the study demonstrated that off-balance-sheet performance may be improved by increasing fee-based income and, ultimately, performance, which would reduce credit risk. In addition, the results reveal a positive association between credit risk and credit risk, lending validity to the claim that financial intermediaries are required. The results of the study add credibility to market portfolio theory and financial intermediation theory. This is one of the first studies to examine credit risk and off-balance-sheet issues in Malaysia; it is also one of the earliest studies of its type. The research will aid legislators, bankers, and academics by enhancing their knowledge of these issues. The study evaluated the issue in three separate countries, taking bank-specific characteristics into consideration. Nevertheless, further study is necessary, especially with a larger sample size and under closer supervision
 

Richard Ennis’s Insights: Cutting through the Fog of Asset Class Labels

Institutional investors use myriad and often ambiguous asset class descriptions that obscure portfolio market exposures for anyone on the outside. This obfuscation makes it difficult to understand risk characteristics and complicates performance evaluation. Fortunately, analytical techniques exist to cut through the fog of asset class labeling.

The Fama-French model for estimating the cost of equity capital: The impact of real options of investment projects

We use the classic and modified Fama-French models to estimate the cost of capital of stock portfolios listed on selected markets. We compare four highly developed markets (US, EU, Japanese and global) and the Polish market as an alternative investment opportunity and a CEE emerging market. The performance of the applied procedures for estimating the cost of capital for company projects is examined and cost of capital is assessed with and without real option adjustment. We adjust the portfolios’ returns using the firms’ book-to-market ratios and idiosyncratic volatility as option proxies. The variability of cost of capital is evaluated using bootstrap methods. Our study shows a clear difference between bootstrapped distributions of cost of capital for the tested developed market and the Polish market portfolios. Wider confidence intervals of the estimated cost of capital of the studied Polish portfolios may result from political motivations in managing state-controlled companies. Our findings also indicate a clear difference between the cost of capital for tested portfolios with and without option adjustment. The widths of the estimated confidence intervals increase after option adjustment. The highest/lowest values of the cost of capital both with and without option adjustment are found for the US/Japanese market portfolios.

Designing Multi-Objective Optimization Model of Electricity Market Portfolio for Industrial Consumptions under Uncertainty

In deregulated electricity markets, the electricity consumer should distribute his required electricity optimally between different markets including spots markets with instantaneous price and bilateral contract markets. The present study is aimed to design a model for selecting the optimal electricity market portfolio, so the purchase costs can be minimized by considering a risk level. For this purpose, an optimization approach based on random planning was proposed to minimize costs and reduce power supply risk. Conditional value at risk was used as an appropriate and well-known factor for reducing unfavorable situations in decision-making under uncertain conditions. For simulations, the real information of Iran in 2018 was used as much as possible. Due to the small number of industrial subscribers, the whole population was studied. A genetic algorithm has been used to solve this optimization problem. In addition, MATLAB software was used for implementing the proposed model. The efficiency of the proposed model was proved by analyzing different sensitivities and the best components of the risk-averse decision-making purchasing portfolio in β=5 included from the energy exchange, then from the energy pool, and finally from bilateral contracts.

The Impact of International Oil Prices on the Return of the Market Portfolio - A Study of the Iraq Stock Exchange for the Period 2012-2019

This study dealt with the issue of the investment portfolio through a number of objectives, the most important of which is about the impact of oil price fluctuations, along with the main economic variables, on the returns of the market portfolio, by applying to all sectors listed in the Iraqi Stock Exchange, based on the quarterly relative data with 32 views during the period from 2012-2019, using a number of different regression analysis models as well as programs and mathematical statistical methods. To that, the study reached a number of conclusions, the most important of which is that there is an indirect relationship between oil price rates and economic variables with rates of returns for the market portfolio, and this relationship is based on a variable There is only one broker, which is the money supply, and it is also possible to build a number of models that explain at high rates between the changes in the rates of oil prices with the rates of returns of the Iraq Stock Exchange portfolio, and the study recommends the necessity of diversification in the investment portfolio by choosing the economic sectors that are affected by varying levels with changes Oil prices to achieve a kind of balance between the return and risk of the market portfolio.

Impact of the Electronic Trading on the Stock Prices of Jordanian Listed Companies

The development of economies has been significantly hampered by inadequate financing. The introduction of securities exchanges is considered as a key strategy for improving access to financing for organizations. The introduction of electronic trading systems in these markets is meant to enable them take advantage of technology and improve access to financing for listed companies. However, the system may have the adverse effect of increasing the level of stock price volatility. A quantitative study using data collected from the ASE is undertaken here. The increase in price volatility for the industrial stocks in the ASE was not statistically significant. The mean returns for the shares were similar in the period before and after the introduction of the system. The findings indicate that the electronic system increases the level of transparency in the market and improvement in efficiency is not accompanied by a change in the price volatility. It was expected that the change in market liquidity and portfolio flows would influence price changes in the market. This was not the case and it may be an indication that the level of returns in the market did not significantly increase.The market returns for the stocks of industrial listed companies are calculated. Using independent samples tests, the returns are evaluated for a period of 5 years before and after the introduction of the system.

Estimation, Instability, and Non-Stationarity of Beta Coefficients for Twenty-four Emerging Markets in 2005-2021

Purpose: The aim of the article is analyse the stability of country beta coefficient for 24 emerging markets between March 2005 and June 2021. The numerous markets studied allow examining the effects on the stability of beta coefficient of various local political, economic and institutional developments (e.g., democratization or intensification of authoritarian rule). The period of several years enables the examination of the effects of global shocks (e.g., financial crisis 2008/2009, pandemic crisis 2020). Design/Methodology/Approach: Estimation covers the beta coefficient defined as the ratio of the covariance of the rate of return of the examined financial instrument and the rate of return of the market portfolio to the variance of the rate of return of the market portfolio. The ratio defined in this way is equal to the coefficient in Sharp linear regression of rate of return of the examined financial instrument (explained variable)and the rate of return of the market portfolio (explanatory variable). The author of the article tested the stability of emerging markets beta using, Chow test, which uses the F statistic, Cusum test based on generalized fluctuations test framework, trend-stationarity analysis (TS) of the time series of beta coefficients obtained in rolling windows, difference stationarity (DS) analysis of the time series beta coefficients obtained in rolling windows too. Findings: The conclusion about the instability of the beta coefficient for 24 emerging markets is based on the results of the Chow, Cusum, trend-stationarity and unit root tests. The results of single tests are not unequivocal due to the random nature of the phenomenon. The study's preliminary hypothesis about the instability of the beta coefficient was not falsified. Practical Implications: Identification of a scientific gap and the need to research a theory that better explains reality and better forecasts for the future, not only in calm times, but also in times of more rapid changes on the markets. Originality/Value: Author’s research of instability of beta coefficient for twenty-four emerging market portfolios, Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Turkey and UAE with four tests (96 tests in total) over the course of 16 years.

Market risk analysis by Linking the Portfolio of the Beta Factor Model (BFM) Modified from the BARRA Model

최근 글로벌 금융시장은 COVID 충격이후 저금리와 양적완화로 인한 유동성 장세 및 변동성 증가로 주가가 높은 상관관계를 보이는 것으로 나타났다. 따라서 주가가 극단치 꼬리 의존성(tail dependence)을 가질 것으로 보아 이를 더 잘 설명하는 Copula 모형을 시장리스크 측정에 적용하였다. 실증분석 데이터는 벤치마크 시장포트폴리오로 미국 주식시장의 Vanguard S&P500 ETF와 GICKS의 글로벌 산업분류 표준에 의한 11개 산업의 Vanguard ETF 섹터를 분석에 사용하였으며, 분석기간은 2018년 1월 3일~2021년 3월 17일까지이다. 본 연구의 분석모형은 MSCI의 BARRA 산업요인모형(IFM)을 수정한 베타요인모형(BFM)을 최초로 적용하였으며, 공격적 베타와 방어적 베타의 최소분산 가중치를 Student’s t-Copula-VaR 및 ES를 산출하는 데 적용하였다. 분석 결과를 요약하면, BFM모형의 연간 수익률은 2.688%로서 공매도를 제약한 공격적 베타 41.72%와 방어적 베타 39.44%에 비해 현저히 낮았으며, 이 같은 결과는 공매도에 기인된 것으로 추정된다. 또한 모수적 및 비모수적 방법에 의한 VaR, Student’s t-VaR, 그리고 Student’s t-ES는 신뢰수준이 클수록 크며, BFM의 시장 리스크는 모수적 및 비모수적 방법에 관계없이 베타 투자전략에 비해 더 낮았다. 또한 Student’s t-Copula VaR 및 ES는 베타 투자전략에서 모수적 방법이 비모수적 방법보다 작고, 비모수적 방법의 시장 리스크는 공격적 베타 투자전략이 방어적 베타 투자전략 보다 더 큰 것으로 나타났다. 본 연구의 공헌도는 BFM을 시장 리스크 측정에 최초로 도입하였으며, 리스크 매니저가 모델 시장위험을 선제적으로 대응할 수 있는 방향성을 제시하였다. 또한 변동성 충격을 반영하기 위한 꼬리 의존성의 적용은 주변확률(Marginal) t-분포에 의한 통계량(, , )을 계산한 후 모수적(parametric) Student’s t-Copula VaR 및 ES에 대한 분석적(analytic)산출이 가능하도록 하였다. 본 연구의 한계점은 변동성 충격 시기 전·후의 시장 리스크의 차이점을 분석하지 못한 한계점이 존재한다. 추후 연구과제로는 이 같은 한계점을 극복하고 시변(time-varying)변동성이 고려된 동태적(dynamics) Copula를 적용하는 데 대한 연구가 필요하다.Recently, the global financial market has been shown to show a high correlation with the stock price, along with the increase in liquidity market and volatility due to low interest rates and quantitative easing after the COVID shock. Therefore, the Copula model, which explains this behavior better, was applied to the market risk measurement, considering that stock prices have extreme tail dependence of high kurtosis and thick skewness. For the empirical analysis data, the US stock market was analyzed, and the Vanguard S&P 500 ETF and the Vanguard ETF sector of 11 industries according to the global industry classification standard of GICKS were used for the analysis as the benchmark market portfolio. The analysis period is from January 3, 2018 to March 17, 2021. For the analysis model of this study, the beta factor model (BFM) modified from MSCI s BARRA industry factor model (IFM) was applied to this study for the first time, and the minimum variance weight calculated as a beta investment strategy divided into aggressive beta and defensive beta was applied to calculate Student s t-Copula-VaR and ES. To summarize the analysis results, VaR, Student’s t-VaR, and Student’s t-ES by parametric and non-parametric methods increased as the confidence level increased, and the market risk of BFM was lower than that of beta investment strategies regardless of parametric and non-parametric methods. Also, in Student s t-Copula VaR and ES, the parametric method was smaller than the non-parametric method in the beta investment strategy, and the market risk of the non-parametric method was greater in the aggressive beta investment strategy than the defensive beta investment strategy. The contribution of this study introduced BFM for the first time to calculate market risk, and suggested a direction for risk managers to preemptively respond to market risk in the model portfolio. In addition, in order to apply the tail dependence to reflect the volatility shock, statistics(,,) by marginal t-distribution were calculated, and then parametric Student s t-Copula VaR and ES were analyzed analytically. calculation was made possible. A limitation of this study is that it does not analyze the difference between the same portfolio rebalancing strategy and market risk analysis results before and after the volatility shock period. As a future research task, it is necessary to overcome this limitation and to apply a dynamics Copula that considers time-varying variability.

The heterogeneity of the diversification effect of sustainable development goals related exchange-traded funds

With the launch of the United Nations 2030 Agenda for 17 Sustainable Development Goals (SDGs), investors are encouraged to contribute to solving some of the world's most pressing problems through their business activities. This paper examines the diversification benefits of SDGs exchange-traded funds (ETFs) from the perspective of tactical and strategic investors. Specifically, the risk-adjusted returns of equity market portfolios with and without SDGs ETFs are compared. The incremental impact is assessed using variable weightings, while the persistence is investigated over time. The results show that the effects of diversification vary greatly across SDGs. ETFs linked to economic growth and innovation improve reward-risk ratios significantly, particularly for strategic investors. ETFs associated with renewable energy, on the other hand, deteriorate portfolio efficiency. The ETF based on good health has the potential to reduce portfolio downside risk. The findings provide useful implications for investors seeking to add value through socially responsible investing.

A Wavelet Perspective of Crisis Contagion between Advanced Economies and the BRIC Markets

This paper investigates the relationship between the BRICs’ and the advanced economies’ stock markets from 2000 to 2016 utilizing continuous wavelet transform. The continuous wavelet transform allows us to explore these relationships in the time–frequency domain to capture short- and long-term investors’ perspectives. Bi-directional spillovers are captured in terms of returns and volatility. In addition to covering the periods of the dot.com crash, the 11 September 2001 events, the pre-2007 financialization bubble period and the resulting Global Financial Crisis, we study volatility spillovers arising from the BRIC, U.S. and European market shocks post the Global Financial Crisis. Based on our results, we confirm findings in relatively fragmented literature that document time-varying and imperfect BRIC markets’ integration with mature economies. Overall, we show that arbitrage opportunities continue to exist in international stock market portfolios with respect to BRIC assets. In a major addition to the literature, our study captures spillovers from the advanced economies’ shocks to BRIC markets, as well as contagion from BRIC markets’ shocks to advanced economies’ markets.

Riding the 1/N Premium

This article proposes a simple and effective rotation strategy. The strategy rotates between the value-weighted market portfolio (VW) and the equal-weighted counterpart (EW) based on an implicit market signal—the lagged one-month market return. The authors report a statistically significant relation between the lagged one-month market return and the future 1/N premium, which is the return difference between the EW and VW portfolios. Building on the predictive quality and exploiting the time-varying nature of the 1/N premium, they introduce a transparent and robust investment strategy that yields superior absolute and risk-adjusted returns.

Sensitivities-Based Method and Expected Shortfall for Market Risk Under FRTB and Its Impact on Options Risk Capital

The changes in the Basel FRTB regulation come into effect in 2023 and will expose banking institutions to new challenges in terms of implementation, risk quantification and impacts on capital requirements. This paper first suggests an algorithm for implementing the FRTB standardised approach via the sensitivities-based method to estimate a portfolio's market risk capital and presents an illustration applied to an option position. Second, it proposes a methodology to estimate the expected shortfall in options portfolios from the FRTB internal models approach. In this regard, an application is developed to measure ES and VaR's impacts under FRTB vs conventional VaR in a currency option position by considering stress scenarios from the 2007-9 and 2020-1 crises and back-testing procedures. The proposals developed weave a communication bridge between the FRTB standardised and internal approaches that can be scaled up institutionally.

Herding and market volatility

In this paper, we explore the impact of investor herding behavior on stock market volatility. We adopt a direct herding measure based on the variation of cross-sectional stock betas. The measure can be readily separated into positive and adverse components, whereby investors herd towards and away from the market portfolio, respectively. Using A-shares listed in the Chinese equity market from August 2005 to March 2021, we show that the market volatility is Granger caused by the measure, and that there exists an asymmetric effect between positive and adverse herding on volatility. Furthermore, we provide robust evidence that the information contained in the herding measure helps generate significantly improved volatility forecasts and add economic value to investors. Our paper not only contributes to the volatility forecasting literature but also advances our understanding of herding in the equity market.

Exploiting the volatility potential on the stock market

An overview of the ideas about the tools and indicators for measuring the variability, instability, fluctuation in time of stock market prices and their profitability is given (on the example of five socially significant banks), the need for their assessment is justified. It is concluded that in the conditions of the economic crisis, the assessment of the probability of income loss is highly relevant. Risk is the most important factor that should be taken into account when forming a securities portfolio. When selecting assets for a portfolio, an investor is faced with a choice: to what extent is an increase in the risk measure acceptable with an increase in profitability? There is a need for a comparative characteristic of the investment portfolio. One of the ways to reduce the volatility of the portfolio is to change its composition by replacing an asset with high volatility with an asset with low volatility, or better - with a risk-free asset. It is concluded that the β-coefficients are the simplest indicator of the degree of sensitivity of the yield of a stock or a portfolio of shares selected for purchase to the yield of a market portfolio of shares or the yield of a stock selected as a comparison base. The assessment obtained as a result of the application of financial analysis indicators allows the company's management and the investor to solve the problems of strategic choice, allows them to compare alternatives to the investment strategy and make a judgment on the appropriateness of the choice.

Evaluating the Performance and Ability Explain of Market Index Returns by Selected Stock Portfolios Based on Throughput Accounting Criteria in Comparison with the New Network Matrix Model

One of the strategies used in active portfolio management is the matrix model which can be used to form different portfolios with different characteristics of stocks or companies. In this study, with the data of 156 companies listed on the Tehran Stock Exchange during the period 2011 to 2018 using the network matrix model and based on throughput accounting criteria, portfolio formation and their performance with the portfolios of the new network matrix model (Defensive, neutral and aggressive stocks) and market portfolio were compared. The results show that the proposed network matrix model portfolios based on throughput accounting criteria have higher performance than the new network matrix model in terms of Sharpe, Sortino, upside potential, and omega criteria. Also, portfolios consisting of stocks of companies with high system performance, in addition to the above criteria, have higher performance in terms of Jensen's Alpha criteria than the new network matrix model, and in terms of upside potential and omega criteria, have higher performance than the market portfolio. The performance of portfolios consisting of stocks of companies with low system performance has a stronger correlation with the market portfolio compared to the new network matrix model.

Research on the Information Spillover Effect of Production Network：From the Perspective of Analysts

As China’s capital market reform enters the deep-water zone, strengthening the role of security analysts is an excellent way to alleviate the contradiction between the sharply increased market specialization level and the backward literacy of investors. At the same time, unilateralism is on the rise, and the Chinese government has set the “domestic circulation” development strategy. In this dual context, this paper mainly discusses how the production network reflecting the domestic circulation affects the accuracy of analysts’ earnings forecasts.Based on the earnings forecast of listed companies released by security analysts during 2007-2018 and industry input-output data, this paper explores the impact of production networks on analysts’ earnings forecasts. It is found that the production network has an information spillover effect on analysts’ earnings forecasts. That is, when the industry of analyst-following companies is closely related in the production network, the deviation of the earnings forecast issued by analyst-following companies is lower. After measuring primary and secondary industries by tracking ratio, it is found that the spillover direction is from primary to secondary. The mitigating effect of production network correlation and its spillover effect on the information asymmetry at the industry and firm levels faced by analysts provide a specific explanation for the reduction of forecast bias. In addition, the cross-sectional analysis based on industrial policy shows that the marginal effect of production network correlation on analysts’ forecasts is more obvious in non-key supporting industries. Further analysis shows that the role of production network correlation analyst is effective, which promotes the integration of specific production network information into stock prices and reduces the synchronization between the firm and the market portfolio. After classifying the information hierarchy, it is found that analysts mainly increase the interpretation intensity of information at the industry level.The marginal contribution of this paper lies in that: It enriches the relevant literature on the quality of analysts’ earnings forecasts from the industry perspective, and highlights the importance of industry correlation that may have been neglected in the early stage. Different from the micro-perspectives of suppliers and customers, this paper extends the information spillover of industrial chain to the multi-dimensional production network, and enriches the research on industry association from the perspective of network. On the practical level, from the perspective of the inter-industry input-output that forms the domestic circulation, the emphasis on the role of production network and analysts is of certain practical significance for improving the efficiency of market information and promoting the professional reform.

Bank stocks, risk factors, and tail behavior

We examine how the tail behavior of risk factors affects the tail behavior of individual bank stock returns in the United States. Using 26 common risk factors, we construct univariate and multivariate conditional exceedance measures. We find that returns on banking industry, security-trading industry, and broad market portfolios have the largest impact on the probability of observing high positive tail returns on bank stocks. A small-minus-big bank return factor, market volatility, and a profitability risk factor have the largest impacts on the probability of lower tail returns. Bank capital ratios and total allowances for loan losses are notably related to tail risk. • The tail risk of bank returns is highly sensitive to the tail risk of several underlying risk factors. • Tail risk can more than triple when key market risk factors exhibit extreme realizations. • Bank capital ratios and total allowances for loan losses are also notably related to tail risk.

Active and Passive Investing: Understanding Samuelson’s Dictum

Abstract We model how investors allocate between asset managers, managers choose portfolios of multiple securities, fees are set, and security prices are determined. Investors are indifferent between higher-cost informed managers and lower-cost uninformed managers, interpreted as passive managers as their portfolio is linked to the " expected market portfolio." We make precise Samuelson's dictum by showing that active investors reduce micro-inefficiencies more than they do macro-inefficiencies. In fact, all inefficiency arises from systematic factors when the number of assets is large. Further, we show how the costs of active and passive investing affect macro- and micro-efficiency, fees, and assets managed by active and passive managers. Our findings help explain the rise of delegated asset management and the resultant changes in financial markets.

Is the Market Portfolio Affected by Individual Investors' Preference and Wealth?

Merton (1990, p.44) claims that the market portfolio can be constructed without the knowledge of preferences and the distribution of wealth. However, the analytical equilibrium solution to the CAPM market reveals that it is not true. Investors' preferences and wealth affect the equilibrium price of the market, they do not affect the mathematical form of the CAPM formula, but change the values of the variables in the formula.