Portfolio Of Securities Research Articles

Risk Measuring Under Liquidity Risk

We present a general framework for measuring the liquidity risk. The theoretical framework de fines risk measures that incorporate the liquidity risk into the standard risk measures. We consider a one-period risk measurement model. The liquidity risk is defi ned as the risk that a given security or a portfolio of securities cannot be easily sold or bought by the financial institutions without causing signi ficant changes in prices. The new risk measures are decomposed into two terms, one measuring the risk of the future value of a given position in a security or a portfolio of securities, and the other the initial cost of this position. Within the framework of coherent risk measures, the risk measures applied to the random part of the future value of a position in a determinatesecurity present some diff erences with respect to the standard riskmeasures. In particular, they are increasing monotonic and convex cash subadditive on long positions. The contrary, in certain situations, holds for the sell positions. For the long positions case, we provide these new risk measures with a dual representation. In some speci fic cases also the sell positions can beequipped with a dual representation. By using convex risk measures, we apply our framework to the situation in which financial institutions break up large trades into many small ones. Dual representation results are also obtained for both positions in securities and portfolios. We give many practical examples of risk measures and derive for each of them the respective capital requirement, and show that our setting can also be applied to contingent securities. As aparticular example, we discuss the VaR measure.

A New Variance Reduction Technique for Estimating Value-at-Risk

In this article we present a new variance reduction technique for estimating the Value-at-Risk (VaR) of a portfolio of various securities via Monte Carlo (MC) simulation. The technique can be applied for any type of distribution of the risk factors, no matter if light- or heavy-tailed. It consists of a particular variant of importance sampling where the change of measure is obtained by using an approximation to an optimal importance sampling density. Any approximation of the portfolio loss function (such as the popular Delta–Gamma approximation) can be used. An in-depth numerical study in the case of risk factors with light-tailed distributions exhibits a great variance reduction when estimating the probability of large portfolio losses outperforming other known methods.

Liquidity Risk and Economies of Scale in Fundsof Hedge Funds

Using data from the Lipper/TASS hedge fund database over the period 1994–2011, the authors examine the effect of liquidity risk on the relationship between size and performance for funds of hedge funds (FOFs). After confirming a significant positive size effect for FOFs, they explicitly introduce liquidity risk and find that this scale effect becomes more pronounced among FOFs with lower liquidity risk. To the extent that more illiquid FOFs exhibit higher liquidity risk, the results provide evidence in support of the liquidity hypothesis that size does not erode, but instead helps improve, performance, since FOFs do not directly manage portfolios of securities and thus are less affected by the liquidity costs associated with trading a large portfolio.

Optimization of securities portfolio in prohibited transactions "short sale"

The problem of optimizing the structure of the securities portfolio at the impossibility of "short sales." Article analytic solution arises when this quadratic programming problem considering the non-negativity of variables for a portfolio containing three stocks and risk-free asset . Obtained in explicit form equation of the boundary of efficient portfolios , the composition of T- bet for a given portfolio risk-free asset . The results of calculations of efficient portfolios and their characteristics .

A Dynamic Structural Model of a Bank with Correlated Assets

I value the liabilities of a bank whose assets consist mainly of loans. Specifically, the bank’s assets consist of multiple correlated securities, which could be some mixture of loans and non-lending assets. My model extends the work of Atreya, Mjos, and Persson (2015), in which the bank’s assets consist of one loan at a time. Modeling the bank’s assets as a portfolio of loan securities allows me to quantify the effect of intra portfolio correlation on the value of the bank’s liabilities.

Different Variants of Fundamental Portfolio

Abstract The paper proposes the fundamental portfolio of securities. This portfolio is an alternative for the classic Markowitz model, which combines fundamental analysis with portfolio analysis. The method’s main idea is based on the use of the TMAI1 synthetic measure and, in limiting conditions, the use of risk and the portfolio’s rate of return in the objective function. Different variants of fundamental portfolio have been considered under an empirical study. The effectiveness of the proposed solutions has been related to the classic portfolio constructed with the help of the Markowitz model and the WIG20 market index’s rate of return. All portfolios were constructed with data on rates of return for 2005. Their effectiveness in 2006- 2013 was then evaluated. The studied period comprises the end of the bull market, the 2007-2009 crisis, the 2010 bull market and the 2011 crisis. This allows for the evaluation of the solutions’ flexibility in various extreme situations. For the construction of the fundamental portfolio’s objective function and the TMAI, the study made use of financial and economic data on selected indicators retrieved from Notoria Serwis for 2005.

Data Mining with Markowitz Portfolio Optimization in Higher Dimensions

In the spirit of financial analytics, this is an applied statistical approach to the data mining of equities price trends in order to gain insight into selecting the most desireable portfolios on the basis of return, volatility, and intersecurity time series correlation. It expands the Markowitz Portfolio Theory approach, which depends upon a multivariate normal distribution of log returns, in finding optimal security portfolios to higher dimensions (N~p). Results are reported for hundreds of candidate securities using data adjustments followed by quadratic programming in the R language.

Stock and Index Derivatives and Markets

Stock options have been traded in the United States from the late 1700s, and they are based on underlying common stock issues. Options and futures on corporate securities can be evaluated using the firm’s common stock price and its volatility rate because this exercise takes in consideration only one type of uncertainty: the firm’s value. Thus, the price of all corporate securities will correlate with one another over time. Stock derivatives involve four common trading and risk management strategies, dividend spread, collar agreements, variable prepaid forward, and the fourth involves either the sale of at-the-money puts or selling at-the-money puts plus buying at the-money calls (a.k.a., an option collar). The latter is typically adopted by large corporations. Stock index futures and options were created in the early 80s, and the underlying securities are stock indices. Indices are composite groups of stocks that model and simulate a portfolio of securities. More recently exchange-traded funds, ETFs have attracted significant attention in the market. Each ETF is a composite of securities that effectively trades as a stock portfolio. On this survey the nature of such instruments, their valuation, and risk management strategies are analyzed.

X-Sigma-Rho and Market Efficiency

Menchero and Davis (2011) define X-Sigma-Rho as a risk metric that shows the marginal contribution to risk when a security is added to a portfolio of other securities. While insightful regarding risk, their work is incomplete because it does not consider the marginal contribution to return. This paper completes their analysis by including marginal contribution to return. In equilibrium the result is the capital market line and a measure similar to Jensen’s alpha that can be used to measure performance.

A New Variance Reduction Technique for Estimating Value-at-Risk

In this paper we present a new variance reduction technique for estimating the Value-at-Risk of a portfolio of various securities via Monte Carlo simulation. The technique can be applied for any type of distribution of the risk factors, no matter if light- or heavy-tailed. It consists of a particular variant of importance sampling where the change of measure is obtained by using an approximation to an optimal importance sampling density. Any approximation of the portfolio loss function (such as the popular Delta-Gamma approximation) can be used. An in-depth numerical study in the case of risk factors with light-tailed distributions exhibits a great variance reduction when estimating the probability of large portfolio losses outperforming other known methods.

Investment Opportunity Sets of Real Assets: An International Empirical Study Based on Ownership Types

This paper is the first, to our knowledge, to make the distinction between the investment opportunity set of real assets versus portfolio securities. We perform a large scale formal investigation of the investment opportunity set in global acquisitions based on ownership type over the period of 1985-2012. Compared to private acquirers, government acquirers have a much reduced investment opportunity set. Government acquirers invest in fewer target nations and industries, settle for smaller stakes, invest in countries with lower quality legal institutions and in nations with which political relations are more positive and see a 50% higher deal failure rate.

Securities Selection and Portfolio Optimization: Is Money Being Left on the Table?

In this report we ask the questions Can fund managers form better-performing portfolios of stocks or bonds, in particular, can they take advantage of: 1) Single-index Capital Asset Pricing Models (CAPM), 2) Multi-factor models, 3) Generalized CAPM (G-CAPM) to improve stock and bond mutual fund performance? We find the following answers: 1) Using CAPM can increase gross annual returns by 70 basis points to 80 basis points, 2) Using multi-factor models can increase gross annual returns by 200 basis points or more, 3) Using G-CAPM can increase gross annual returns by 300 basis points or more.

Portfolio Spillovers and a Limit to Diversification

Securities are exposed to the return shocks of seemingly unrelated securities in common mutual fund portfolios. Shocks to firm returns mechanically affect fund returns that hold these securities, which induce investor-driven flows and rebalancing, resulting in temporary flow-induced price pressure (FIPP) on other firms in common portfolios. Instrumenting to address flow/return endogeneity, a one standard deviation increase in the FIPP corresponds to a 15-60 bps increase in daily abnormal firm returns. This pressure reverses in 5-6 days and is larger for liquid firms and for funds experiencing outflows. Failing to properly estimate this correlation implies that an investor is exposed to nonsystematic risk.

Mutual Funds, Fairness, and the Income Gap

The rich, it turns out, are different from the rest of us. The wealthy, for example, can assemble a diversified portfolio of securities, or can invest through hedge and private equity funds. When the rest of us invest, we do so largely through mutual funds. Nearly half of American households own mutual funds, and mutual funds represented a significant portion of the financial assets held by U.S. households. The tax rules governing mutual funds create an investment vehicle with significantly worse tax treatment than investments available to the wealthy. In particular, the tax rules governing mutual funds force shareholders to pay taxes on “forced realization income,” even though such income does not increase their wealth.Because mutual fund investors must pay taxes on non-existent gains, while the wealthy can use alternative investment strategies to avoid such taxes, the taxation of mutual funds violates the tax policy objective of vertical equity. To correct the inequities faced by mutual fund investors, the tax law needs to permit low- and middle-income taxpayers to exclude from their income 10 percent of the capital gain dividends they receive each year.

Volatility spillovers and dynamic correlation between liquidity risk factors in Tunisian banks

This paper analyses the volatility spillover and the dynamic correlation between liquidity risks factors in Tunisian banks over 1990:1 2011:12. Based on the BEKK-GARCH estimation results, we find a significant volatility spillover between deposit and loan to economy and between securities portfolio and equity, respectively. Also, the results show a bidirectional volatility transmission between deposit and the most important determinants of liquidity risk. Besides, the dynamic correlation shows that deposits and equity are the main important resources for banks in order to finance economy. With these resources, banks can allocate more credit and invest in securities market. Also, the volatility spillover explains the contagion between all liquidity factors. These findings must induce Tunisian policymakers to impose measures such as exposure limits to reduce the liquidity contagion likelihood, as part of the macro-prudential approach, to stabilise growth.

Valuation of common and preferred stocks

Buying stocks is a modern way of investing. The investors may place the available capital on the domestic and foreign stock market, they may buy more stocks of a single issuer or distribute money to purchase stocks of various public (stock-exchange) companies, and they may form a portfolio of various securities. The investors' decisions on these options are based on their estimate on returns and risks underlying individual security instruments (securities). The two basic approaches to valuation of common stocks are: the Present Value Approach (method of valuating the capitalization of income) and the P/E Ratio Approach (the method of valuating the multiple of per-share earnings). Instead of viewing these methods as competing alternatives, they should better be viewed as mutually complementary methods. Both methods are equally useful and their concurrent use may provide better grounds for the analysts' valuation of stocks.

Do Correlated Defaults Matter for CDS Premia? An Empirical Analysis

Correlated defaults and systemic risk are clearly priced in credit portfolio securities such as CDOs or index CDSs. In this paper we study an extensive CDX data set for evidence whether correlated defaults are also present in the underlying CDS market. We develop a cash flow based top-down approach for modeling CDSs from which we can derive the following major contributions: (I) Correlated defaults did not matter for CDS prices prior to the financial crisis in 2008. During and after the crisis, however, their importance has increased strongly. (II) In line with a plausible default order, we observe that correlated defaults primarily impact the CDS prices of firms with an overall low CDS level. (III) Idiosyncratic risk factors for each single CDS play a major (minor) role when the CDS premia are high (low).

Pricing equity and debt tranches of collateralized funds of hedge fund obligations: An approach based on stochastic time change and Esscher-transformed martingale measure

Collateralized Funds of Hedge Fund Obligations (CFOs) are relatively recent structured finance products linked to the performance of underlying funds of hedge funds. The capital structure of a CFO is similar to traditional Collateralized Debt Obligations (CDOs), meaning that investors are offered different rated notes and equity interests. CFOs are structured as arbitrage market value CDOs. The fund of funds manager actively manages the fund to maximize total returns while limiting price volatility within the guidelines of the structure. The aim of this paper is to provide a useful framework to evaluate Collateralized Funds of Hedge Fund Obligations, that is pricing the equity and the debt tranches of a CFO. The basic idea is to evaluate each CFO liability as an option written on the underlying pool of hedge funds. The value of every tranche depends on the evolution of the collateral portfolio during the life of the contract. Care is taken to distinguish between the fund of hedge funds and its underlying hedge funds, each of which is itself a portfolio of various securities, debt instruments and financial contracts. The proposed model incorporates skewness, excess kurtosis and is able to capture more complex dependence structures among hedge fund log-returns than the mere correlation matrix. With this model it is possible to describe the impact of an equivalent change of probability measure not only on the marginal processes but also on the underlying dependence structure among hedge funds.

The Optimization and Evaluation of Investment Portfolio

Investment to assets is getting more and more importance today. Shares of stock options have become one of the region’s economic indicators illustrating current economic situation. The main subject in researches of investment portfolios forecasting became a discussion about what values are best to measure portfolio risk and expected returns. Also there is a wide range of researches on macroeconomic and social events influence on evolution of stock returns. The main problem of today’s professional investment is to achieve the master level of complex investment decision adoption, included macroeconomic and historical data return analysis. The main aim of this work is to overview the portfolio optimization and evaluation models and to apply them to form the different portfolios of securities on the Vilnius Stock Market and compare them in the factor of conservativeness. There are used mean-risk models, such as Markowitz classic model, Mean Absolute Deviation model and MiniMax model, to optimize the investment portfolio in this research. Also there is performed the approbation of the multifactor model to evaluate the formed portfolios and to see the influence of the macroeconomic indexes to stock returns. Studies of this research showed 8 indicators, which have strongest linear dependence on shares return: VILIBOR interbank interest rate, consumer prices index, producer price index, construction expenses price index, trade balance, foreign direct investments, gross domestic product and inflation. Multifactorial analysis results showed that approved model to shares return data is not statistically reliable. Also, after further analysis there were found that Markowitz and Mean Absolute Deviation models create more conservative and optimal portfolio compared to MiniMax model, which is more suitable for aggressive and speculative investor. DOI: http://dx.doi.org/10.5755/j01.ee.24.4.5416

Security portfolio management based on combined entropic risk measures

A combined entropic financial risk measure that is a convex combination of the entropic risk measure and the CVaR measure is considered. The effectiveness of the proposed measure in the formation of security portfolios is analyzed. Results of computational experiments are presented.