Portfolio Behavior Research Articles

Trolls, Nuisance Suits, and the FTC

The FTC’s Patent Assertion Entity Activity Report includes a path-breaking collection of data. Because of the FTC’s ability to force businesses and individuals to provide information, a power that no ordinary researcher possesses, the FTC has amassed a data set that can potentially be of great value. For example, the Report’s description of litigation PAEs and portfolio PAEs structure and behavior is, although not entirely new, very instructive. Unfortunately, the FTC made analytical errors that precludes using its work to directly support policy prescriptions. First, the FTC claims that if a suit settles for less than $300,000 then the suit was likely Negative Expected Value. In addition, the FTC claims that Negative Expected Value suits are bad. These claims are false. Second, the FTC’s policy recommendations have no connection to any of its factual analysis. And so, in terms of providing normative guidance, the Report is a failure.

Behavior of inter-enterprises patent portfolio for different market structure

With the in-depth shift from an industry-based society to a knowledge-based one, innovative companies use their own patents to create and exploit new opportunities. In recent years, leading innovative companies have attempted to establish an inter-enterprises patent portfolio alliance (such as patent pool and so on) and create leveraging opportunities through patent portfolio behavior. In this paper, we consider the question of how many firms and when can implement its patent portfolio behavior for different market structures with homogeneous patential products. Based on the classical Cournot model, we propose an economic game mode and analyze the above question. We find that the profits of the firms that have established a patent portfolio alliance is increasing but also the profits change of the firms that have not established the same patent portfolio alliance is uncertain when compare with the situation with both non-establishing the same patent portfolio alliance and Cournot competition. We also find that there is a minimum moderate number scale of the firms that have established an inter-enterprise patent portfolio alliance within the industries whose enterprises numbers are different. These conclusions not only explain patent portfolio behavior of some innovative firms such as those in the DVD industry11For more details on the patent portfolio behavior of enterprises in DVD industry, see Section “6.2. A real case”. but also have its potential generalization to some innovative companies and considering how it can be used to indicate profits drivers for inter-enterprises patent portfolio behaviors.

Portfolio Selection and Dynamic Behavior in Heston's Stochastic Volatility Model Using a Contingent Claim

In the existing literature, little is known about the dynamic behavior of the optimal portfolio in terms of market inputs and arbitrary stochastic factor dynamics in an incomplete market with a stochastic volatility. In this paper, to study the optimal portfolio behavior, we compute and analyze the mean and the variance of the optimal portfolio and of its adjustment speed in terms of market inputs in an incomplete market. The incompleteness arises from the additional source of uncertainty of the volatility in Heston’s stochastic volatility model. We discuss a novel way of completing the incomplete market by introducing an artificial European option, which is then made completely uninteresting to the investor. We then apply the martingale method to the completed market to obtain the optimal portfolio in a closed form. Conducting sensitivity analysis for the mean and the variance of the optimal portfolio process as well as its adjustment speed to the market parameters, we find several interesting investor’s behavioral patterns toward asset price and its volatility shocks. Our results are robust and convergent by the agreement from two simulation methods for different time step increments and the numbers of Monte Carlo simulation paths.

Overreaction Analysis In State-Owned Equities

This paper challenges the research hypothesis that psychological factors and market sentiment can influence and alter the trajectory of state-owned equities. For this purpose, an overreaction analysis was performed in a wide data spectrum consisting of daily returns of 184 state-owned enterprises operating in countries from three continents, over a ten year period divided in five biannual test periods. Portfolio separation and Cumulative Abnormal Returns generated no evidence towards the existence of overreaction phenomena across all test-periods. Average and Median Cumulative Abnormal Returns, tested with parametric and nonparametric statistical analysis, did not exhibit reversal patterns in the behavior of loser and winner portfolios, thus neutralizing the possibility of earlier overreaction in the state-owned stocks under study. The outcome concerning state-owned enterprises contrasts with the corresponding research hypothesis and outcomes in the literature regarding behavioral economics and overreaction effects in private enterprises.

Liquidity, Price Behavior, and Market-related Events

We investigate the price behavior of stock market portfolios sorted by liquidity and/or size surrounding strong market events. Our sample includes 74 events that represent return movements for the market that are ±4.5 standard deviations from average returns. None of these market events are associated with explanatory ‘causes.’ Using standard liquidity measures, the Amihud and turnover tests, we find that large liquid stocks react in a stronger manner to market shocks. In addition, these stocks experience faster reversal following the shocks than do illiquid and small stocks. We interpret this as indicating that large liquid stocks are more market related. We also find that small illiquid stocks have more idiosyncratic risk than liquid and large stocks. These outcomes have implications for investors wanting to construct portfolios to mimic the market and also for portfolios that might be expected to move more (or less) strongly during market events.

The Impact of Capital Regulation on Bank Capital and Risk Decision. Evidence for European Global Systemically Important Banks

Large banks were largely blamed for the recent financial crisis, due to their roles in the propagation of the crisis. Partly due to the unprecedented amount of public funds disbursed to rescue the fail banks to avert the total breakdown of the global financial system and the resultant moral hazard of their bailout. Policymakers and regulators have significantly increased bank regulations after the crisis to rein-in some of the “excesses” of the banks that cause to the financial crisis. Particularly, Basel III capital regulation came into existence largely to strengthening the capital framework for banks and increases the loss absorbency for the so-called too big to fail banks. This study investigates the impact of capital regulation on the capital and risk portfolio behaviour of European large and complex banks during the period 2009–2014. By using a modified version of the structural equation model developed by Shrieves and Dahl (1992) to estimate the effect of capital regulation on banks’ capital and risk portfolios decisions. The findings of our model estimation indicate that regulation has a significant impact on changes in bank capital. We, however, do not find any significant evidence of the impact of regulation on bank risk portfolio decisions. Model estimation results also show that there is a significant negative relationship between changes in bank capital level and changes in risk portfolio level and vice versa.

Better Investing Through Factors, Regimes and Sensitivity Analysis

Recent periods of market turbulence and stress have created considerable interest in credible alternatives to traditional asset allocation methodologies. It would be preferred if portfolios can be decomposed into components that can be directly connected to independent risks and individually rewarded by the market for their level of risk. This can be achieved through factor-based investing, which relies on the observation that most return and risk characteristics for all asset classes can be well explained by particular building blocks, or factors.We describe main features of factors, factor investing and factor models, with emphasis placed on practical topics such as selection of significant factors associated to specific asset classes, differentiating between factors, anomalies or stylized facts, and preference for composite portfolios based on combining factors. We have also analyzed implementation details and the factor risk parity strategy.Then we consider improvements to factor-based investing through regime switching and sensitivity analysis. We present theoretical and practical frameworks for Markov switching models and for sensitivity analysis, and rely on representative examples to illustrate the benefits of efficiently incorporating regimes and sensitivity analysis into portfolio management.The final section describes features of good testing procedures for portfolio behavior and performance, in contrasts with possible testing pitfalls.

Expected utility and portfolio selection: an econometric study of Pakistan's commercial banking sector

This paper attempts to explain the portfolio behaviour of Pakistani banks. Several expected utility models are developed and applied to semi-annual data for the period from 1997 to 2012. The expected utility model commonly reduced to the mean-variance model, of bank portfolio behaviour under risk stems from the works of Hicks, Tobin and Markowitz. According to this approach, the determinants of alternative portfolios can be assessed by the trade-off between their expected return and valuation risks, where the former is the mean of the probability distribution of return and the latter is usually approximated by the variance of that distribution. Different theoretical restrictions have been tested to explain the Pakistani banking portfolio including symmetry and homogeneity of the interest rate matrix. Empirical evidence suggests that, in general, changes in interest rates do explain the changes in the portfolio of these units, but the availability of funds and other policy variables were found to be more important.

An Examination of the Geographic Aggregation of Catastrophic Risk

The debate in the United States about establishing a mechanism for insuring catastrophic wind risk at the national level pre-dates the intense 2004–2005 hurricane seasons. The prevailing argument against establishing any larger risk pool is that it would create a subsidy for the higher risk exposures. To determine whether benefits do accrue by aggregating catastrophic risk across increasingly wide geographic areas, the paper uses catastrophe models to evaluate the behavior of residential property portfolios within the state of Florida and for a larger risk pool that includes multiple combinations of coastal states in the southeastern United States. We find that geographic aggregation does not inherently subsidise high-risk exposures, reduces uncertainty, and reduces required reserves relative to total exposure for the least frequent and more severe events. This finding holds true for all state combinations evaluated in this study.

Deciphering robust portfolios

Robust portfolio optimization has been developed to resolve the high sensitivity to inputs of the Markowitz mean–variance model. Although much effort has been put into forming robust portfolios, there have not been many attempts to analyze the characteristics of portfolios formed from robust optimization. We investigate the behavior of robust portfolios by analytically describing how robustness leads to higher dependency on factor movements. Focusing on the robust formulation with an ellipsoidal uncertainty set for expected returns, we show that as the robustness of a portfolio increases, its optimal weights approach the portfolio with variance that is maximally explained by factors.

Portfolio Selection and Optimization with Higher Moments: Evidence from the Indian Stock Market

The Markowitz portfolio optimization model, popularly known as the Mean-Variance model, assumes that stockreturns follow normal distribution. But when stock returns do not follow normal distribution, this model wouldbe inadequate as it would prescribe sub-optimal portfolios. Stock market literature often deliberates that stock returns are non-normal. In such context the Markowitz model would not be sufficient to estimate the portfolio risks. The purpose of this paper is to expand the original Markowitz portfolio theory (mean-variance) via adding the higher order moments like skewness (third moment about the mean) and kurtosis (fourth moment about the mean) in the return characteristics. The research paper investigates the impact of including higher moments using multi-objective programming model for portfolio stock selection and optimization. The empirical results indicate that the inclusion of higher moments had a considerable impact in estimating the returns behavior of portfolios. The portfolios optimized using all the four moments, generated higher returns for the given level of risk in comparison to the returns of the Markowitz model during the study period 2000–2011. The results of this study would be immensely useful to fund managers, portfolio managers and investors as it would help them in understanding the Indian stock market behavior better and also in selecting alternative portfolio selection models.

Implications of Heterogeneity in Preferences, Beliefs and Asset Trading Technologies for the Macroeconomy

This paper extends the methodology developed in Chien, Cole and Lustig (2011 & 2012) (hereafter CCL2011 and CCL2012, respectively) to analyze and compute the equilibria of economies with heterogeneous agents who have different asset trading technologies and are subject to both aggregate and idiosyncratic income risk. The different asset trading technologies, which are designed to replicate the portfolio behavior seen in the data, fall into two classes. Active traders manage the composition of their portfolios among a given set of assets in addition to choosing how much to save. Passive traders take their portfolio composition as given and choose only how much to save. There can be a wide variety of different cases within each classes. For active traders, the trading technology varies depending on the set of assets that they can use, while for passive traders it varies with the specific portfolio composition rule. In CCL2011 and CCL2012, all of our agents had to have the same CRRA flow utility functions, discount rates, and beliefs. In this extension, this restriction is relaxed greatly extending the set of economies to which our method applies. This richer degree of heterogeneity allows the model to match a number of key features of the data.

What do robust equity portfolio models really do?

Most of previous work on robust equity portfolio optimization has focused on its formulation and performance. In contrast, in this paper we analyze the behavior of robust equity portfolios to determine whether reducing the sensitivity to input estimation errors is all robust models do and investigate any side-effects of robust formulations. Therefore, our focus is on the relationship between fundamental factors and robust models in order to determine if robust equity portfolios are consistently investing more in the factors opposed to individual asset movements. To do so, we perform regressions with factor returns to explain how robust portfolios behave compared to portfolios generated from the Markowitz’s mean-variance model. We find that robust equity portfolios consistently show higher correlation with the three fundamental factors used in the Fama-French factor model. Furthermore, more robustness among robust portfolios results in a higher correlation with the Fama-French three factors. In fact, we show that as equity portfolios under no constraints on portfolio weights become more robust, they consistently depend more on the market and large factors. These results show that robust models are betting on the fundamental factors instead of individual asset movements.

Simulation of Diversified Portfolios in a Continuous Financial Market

In this paper we analyze the simulated behavior of diversified portfolios in a continuous financial market. In particular, we focus on equally weighted portfolios. We illustrate that these well diversified portfolios con- stitute good proxies of the growth optimal portfolio. The multi-asset market models considered include the Black-Scholes model, the Heston model, the ARCH diffusion model, the geometric Ornstein-Uhlenbeck volatility model and the multi-currency minimal market model. The choice of these models was motivated by the fact that they can be simulated almost exactly and, therefore, very accurately also over longer periods of time. Finally, we pro- vide examples, which demonstrate the robustness of the diversification phe- nomenon when approximating the growth optimal portfolio of a market by an equal value weighted portfolio. Significant outperformance of the market capitalization weighted portfolio by the equal value weighted portfolio can be observed for models.

Optimal Corporate Pension Policy for Defined Benefit Plans in the Presence of PBGC Insurance

This paper develops a general continuous-time framework for defining the optimal corporate pension policy for defined benefit (DB) plans in the presence of PBGC insurance. Interactions between the firm's optimal investment and financing policies and the optimal portfolio strategy for DB plans are studied. In normal, non-distressed times, the optimal pension portfolio rule from the equityholders' ’perspective is acceptable to both the participants and PBGC. However, this is no longer the case when the firm approaches financial distress. The PBGC put then emerges in the consolidated balance sheet, and the firm's optimal portfolio behavior becomes more aggressive. We recommend that the PBGC obtain a control right on pension decisions made by sponsoring companies near distress.

Effects of monetary policy on banks asset portfolio behaviour; evidence from Nigerian economy (1980 – 2009)

Effects of monetary policy on banks asset portfolio behaviour; evidence from Nigerian economy (1980 – 2009)

La demande de monnaie dans la zone euro revisitée

Résumé L’article propose une analyse empirique de la demande de monnaie (M3) dans la zone euro sur la période 1981-2008. Pour expliquer la croissance rapide de l’agrégat M3 depuis 2001, des variables de richesse relatives aux prix des actifs financiers et immobiliers en termes réels sont introduites. Deux méthodes d’estimation sont utilisées : un modèle vectoriel à correction d’erreurs et un modèle à coefficients variables. La première approche montre qu’en incluant les variables de richesse dans le modèle, nous obtenons un modèle apparemment stable sur la période 1981-2007, mais l’extension de la période d’estimation affecte sa stabilité et remet en question sa pertinence. La seconde approche révèle l’instabilité des fonctions de demande de monnaie – les élasticités et semi-élasticités varient au cours du temps – et met en évidence une relation positive entre les prix des actifs immobiliers et la demande de monnaie (M3) en termes réels. La richesse immobilière joue par conséquent un rôle important pour capturer les comportements d’allocation de portefeuille dans les modèles de demande de monnaie durant la première décennie de ce siècle.

Equilibrium Theory with Link Portfolios

Portfolio constraints often prevent financial derivatives from being synthetically created by primitive assets and thus, open a way for the 'redundant' assets to participate in expanding risk-sharing opportunities. They bring about peculiar portfolios, called 'link portfolios,' at an aggregate level. Link portfolios make no monetary payoff in equilibrium but may account for feasibility of optimal portfolios in constrained asset markets. They are abundant enough to form a linear subspace. This fact has two implications. First, they have null market value in equilibrium because they are marginally useless once the feasibility of optimal portfolios is met. Second, they are free but may have impact on the welfare of agents in equilibrium. Such elusive behavior of link portfolios blocks extending the conventional approach to equilibrium analysis to constrained asset markets. It has remained unresolved for a long time to verify the existence of equilibrium with general forms of convex portfolio constraint. This is because the literature fails to recognize the presence of link portfolios in constrained asset markets and thus, do justice to the analysis of their equilibrium behavior. The paper shows the existence of equilibrium in two-period constrained asset markets with link portfolios. This result is built on the fundamental theorem of portfolio decomposition which allows us to explicate the behavior of equilibrium asset prices and capture the risk-sharing role of link portfolios in equilibrium.

An operator splitting harmonic differential quadrature approach to solve Young’s model for life insurance risk

This paper is concerned with the numerical approximation of a mathematical model for life insurance risk that has been presented quite recently by Young (2007, 2008). In particular, such a model, which consists of a system of several non-linear partial differential equations, is solved using a new numerical method that combines an operator splitting procedure with the differential quadrature (DQ) finite difference scheme. This approach allows one to reduce the partial differential problems to systems of linear equations of very small dimension, so that pricing portfolios of many life insurances becomes a relatively easily task. Numerical experiments are presented showing that the method proposed is very accurate and fast. In addition, the limit behavior of portfolios of life insurances as the number of contracts tends to infinity is investigated. This analysis reveals that the prices of portfolios comprising more than five thousand policies can be accurately approximated by solving a linear partial differential equation derived in Young (2007, 2008).

Consumption hedging and home‐country bias in a model of international capital market equilibrium

PurposeThe purpose of this paper is to develop a model of international capital market equilibrium where investors exhibit home‐country bias due to their desire to hedge real consumption.Design/methodology/approachThis paper posits a two‐stage process of portfolio choice for the representative investor of a country. In the first step, the investor's benchmark portfolio is determined, whereas in the second step, his optimal portfolio is chosen. The latter portfolio maximizes the expected portfolio rate of return minus the risk tolerance weighted variance of tracking error. The market equilibrium implications of the portfolio optimality conditions are determine via aggregation across all investors and countries.FindingsA revised security market line is derived that differs from the traditional security market line in terms of vertical intercept, slope, and beta coefficient. It is demonstrated that the derived model may be interpreted as a multi‐country generalization of the Chen‐Boness extension of the capital asset pricing model under uncertain inflation.Originality/valueThis paper presents an innovative application of Roll's tracking portfolio paradigm. Another novel feature is the derivation of the international capital market equilibrium implications of such portfolio choice behaviour.