US Investment Research Articles

Lender rationality and trade-off behavior: Evidence from Lending Club and Renrendai

Using the data from two leading online lending platforms in the US and China, Lending Club and Renrendai, respectively, we compare the behaviors of risk aversion and risk-return trade-off among US and Chinese online lending investors. We use the event of the implementation of “de-guarantee” policy as a quasi-natural experiment to evaluate the impact of the policy on the behaviors of online lending investors. The results of our study show that prior to 2018, the seemingly irrational behavior of Chinese lenders – blindly pursuing high interest rates regardless of default risk – is a rational response to the fact that the loans they invest in are guaranteed, and after the implementation of the “de-guarantee” policy, Chinese online lending investors exhibit similar risk-averse behaviors as US investors. In addition, we find that lenders on the US online platform consistently exhibit risk aversion behaviors and risk-return trade-off on the interest rate, while Chinese lenders do not demonstrate this trade-off before the implementation of the “de-guarantee” policy.

The convergence of ethical investment business models and their reliance on the conventional US investment market

ABSTRACT This study investigates the extent of convergence of the two key types of ethical investment business models: Islamic Finance (IF) investment and Socially Responsible Investment (SRI) and the level to which these ethical business models are disconnected from the conventional investment market. We undertake an empirical assessment using three key US stock indexes: the Dow Jones Industrial Average, the Dow Jones Islamic Market, and the Dow Jones Sustainable Index. We find that IF and SRI indexes show significant similarities, suggesting that the ethical investment models share common moral and societal values and react similarly to market forces indicating convergence. We also find that the ethical investment models appear to be closely dependent on the conventional US stock market, suggesting inefficiency in the ethical investment model and, therefore, a dominant effect of conventional finance market on ethical investments. These findings are relevant as they allow us to better clarify the perceived convergence/divergence of values in IF and SRIs and to measure the degree of efficiency and credibility of ethical investment models to determine whether they are capable of successfully managing investments, in consideration of social, environmental, and economic factors, with fair, sustainable, and responsible outcomes.

The Kosovo–Serbia normalisation agreements

The leaders of Kosovo and Serbia met in Washington on 4 September, agreeing to 16 points related to economic normalisation, increasing their bilateral trade with the US and their respective relationships with Israel. There were elements of political theatre to the signing, but the negotiating process served to jumpstart the European-led dialogues seeking a final political solution to the impasse. The agreements may well bring substantial US investment to the region, and they also serve as an example of Serbia’s recent attempts to chart a foreign policy more independent of Russia.

미국의 대중국 투자보호주의: 30년전 대일본 투자보호주의와의 비교 고찰

중국의 경제력이 급속히 부상하고 첨단기술분야를 중심으로 중국자본의 미국기업들에 대한 인수방식의 투자가 빠르게 증가하면서 국가안보 차원에서 미국의 대중 투자보호주의가 고조되고 있는 상황은 약 30년전 미국의 대일 투자보호주의의 상황과 외형적으로 유사하다. 그러나 전략적 경쟁국가로 인식되고 있는 중국에 대한 투자보호주의는 과거 대일 투자보호주의에 비해 실제적으로 훨씬 강력한 양상으로 전개되고 있다. 대일 투자보호주의의 경우 투자의 심사과정에서 국가안보의 위협요소로서 경제안보적 성격의 요소를 적용함에 있어 신중한 접근이 이루어졌던데 반해, 중국의 투자에 대해서는 경제안보 차원에서의 규제가 엄격히 적용되고 있다. 일본의 발전국가 체제가 미국의 대일 투자보호주의에 있어 하나의 배경적 요소이기는 하지만 직접적인 충돌의 요소는 아니었다. 이에 반해 중국의 국가자본주의 체제는 중국정부가 직•간접적인 개입을 통해 산업전략 차원에서 기술접근을 목표로 한 대미 투자를 유도할 수 있는 시장 왜곡적 성격을 내재하고 있으며, 미국의 대중 투자보호주의는 이러한 중국의 국가자본주의 체제와 미국의 자유시장경제 체제 간의 직접적인 충돌의 모습으로 이해될 수도 있을 것이다.

Strategic Currency Hedging in Multi-Asset Portfolios

The authors provide a strategic currency hedging framework for multi-asset portfolios, helping global investors better manage foreign currency exposures by balancing hedging costs and risk. The authors focus primarily on G4 currencies—US dollar (USD), euro (EUR), pound sterling (GBP), and Japanese yen (JPY)—but also provide some insights for other G7 currencies. Starting from a single-asset-class perspective, the framework shows that developed market fixed-income instruments should generally be fully hedged back to the investor currency. US investors should fully hedge foreign exchange risk when buying European equities. Japanese equities should be left unhedged for all investors because of the Japanese yen’s value as a safe haven during market panics. Conversely, Japanese investors buying international equities should fully hedge currency risk but may find it optimal to leave some of their US bond exposures unhedged to minimize hedging costs while retaining some diversification benefits. The picture is also nuanced for European investors where the cost-benefit trade-off points to partial hedging as the optimal approach. When it comes to multi-asset investing, hedge ratio optimality also becomes a function of cross-asset correlations, which leads to interesting nuances of approach across domiciles. The authors believe their research provides global investors with useful information to calibrate strategic hedge ratios. <b>TOPICS:</b>Currency, portfolio management/multi-asset allocation <b>Key Findings</b> • We find the optimal hedge ratio dynamically derived from exploring the trade-off between hedging costs and risk minimization generally leads to superior risk adjusted returns than a static approach to currency hedging. • Our mean-variance optimization framework allows practitioners to set a flexible currency hedging policy based on their own risk preference and is applicable to single asset and multi-asset portfolios. The hedge ratio decomposition we propose sheds light on the drivers of the optimal hedge ratio and gives investors the ability to further calibrate their currency hedging policy by putting more emphasis on the driver they deem the most important. • We find developed markets fixed-income instruments should generally be fully foreign exchange (FX) hedged. US investors should fully hedge FX risk when buying European equities. Japanese equities should be left unhedged for all investors due to the Japanese yen’s risk-off characteristics. Conversely, Japanese investors buying international equities should fully hedge currency risk but may find it optimal to leave some of their US bond exposures unhedged to minimize hedging costs while retaining some diversification benefits. The picture is also nuanced for European investors where the cost-benefit trade-off points to partial hedging as the optimal approach. When it comes to multi-asset investing, hedge ratio optimality also becomes a function of cross-asset correlations, which leads to interesting trade-offs.

Pinter, Authorship and Entrepreneurship In 1960S British Cinema: The Economics of The Quiller Memorandum

This article uses primary sources to evaluate how Harold Pinter’s screenwriting for the film The Quiller Memorandum (1966) operated in the business context of film production in Britain. In the mid-1960s, British cinema both claimed forms of national distinctiveness and also sought internationalization by drawing on financial and creative resources from both continental Europe and the USA. The Pinter ‘brand’, choices of cast and production personnel, and links with the ascendant spy genre of the period are argued to be aspects of a business risk reduction strategy, mitigating against such risks as working on location in Berlin and expectations set from a distance by US investors, leading to the constant requirement for budgetary management during production. These forces can be regarded as interactions between the film production company as an entrepreneurial organization, the contingent role of brands as repositories of value, and the relatively stable structures of corporate investment by large firms like Rank in the UK and National General Productions in the USA. The article draws on materials in the British Library’s Pinter Archive and the Film Finances Archive.

National Autonomy or Transnational Solidarity? Using Multiple Geographic Frames to Politicize EU Trade Policy

The article contributes to our understanding of how trade is politicized and how civil society activists manage the tensions between multiple collective action frames in a complex political context. When viewed alongside the Brexit referendum and Trump’s US Presidency, it is easy to see the 2013–2016 campaign against a European Union–US Transatlantic Trade and Investment Partnership as a further example of an apparently growing populist ‘nationalism.’ Yet, in the European context—where campaigning was most visible—there was in fact extensive reliance on, and re-iteration of, a transnational ‘European’ frame, with antecedents in the 1999–2006 campaign against General Agreement on Trade in Services negotiations. As the article argues, transnational campaigning operates within a nexus of multiple, and sometimes conflicting, geographic frames. In both campaigns discussed here, activists typically engaged with the wider public via the national context and, sometimes, with allusions to ‘national autonomy.’ However, their activism was dependent upon a frame espousing ‘transnational solidarity.’ Developed over time, this structured their transnational relations with other groups and more full-time activists.

Do global sentiment shocks spillover towards emerging and frontier markets?

PurposeThis study aims to investigate the impact of sentiment shocks based on US investor sentiments, bearish and bullish market conditions. Earlier studies, though very few, only consider the effect of investor sentiments on stock returns of emerging frontier Asian (EFA) markets.Design/methodology/approachThis study uses the application of regime switching model because of its capability to explore time-varying causality across different regimes unlike traditional linear models. The Markov regime switching model uses regime switching probabilities for capturing the potential asymmetries or non-linearity in a model, in this study’s case, thereby adjusting investor sentiments shocks to stock market returns.FindingsThe results of the Markov regime switching method suggests that US sentiment, bullish and bearish market shocks act as a main contributors for inducing variation in EFA stock market returns. The study’s non-parametric robustness results highlight an asymmetric relationship across the mean series, whereas a symmetric relationship across variance series. The study also reports Thailand as the most sensitive market to global sentiment shocks.Research limitations/implicationsThe sensitivity of the EFA markets to these global sentiment shocks highlights their sensitivity and implications for investors relying merely on returns correlation and spillover. These findings also suggest that spillover from developed to emerging and frontier equity markets only in the form of returns following traditional linear models may not be appropriate.Practical implicationsThis paper supports the behavioral aspect of investors and resultant spillover from developed market sentiments to emerging and frontier market returns across international equity markets offering more rational justification for an irrational behavior.Originality/valueThe study’s motivation to use the application of regime switching models is because of its capability to explore time-varying causality across different regimes unlike traditional linear models. The Markov regime switching model uses regime switching probabilities for capturing the potential asymmetries or non-linearity in a model, in the study’s case, thereby adjusting investor sentiments shocks to stock market returns. It is also useful of the adjustment attributable to exogenous events.

Practical Applications of Return Orthogonality and True Diversification Benefits of BRIC Securities

<h3>Practical Applications Summary</h3> In <b>Return Orthogonality and True Diversification Benefits of BRIC Securities</b>, from the Summer 2019 issue of <b><i>The Journal of Index Investing</i>, Javier Rodríguez</b> of the <b>University of Puerto Rico</b> analyzes the diversification benefits to US investors of using closed-end funds (CEFs) and exchange-traded funds (ETFs) to access emerging markets in BRIC countries. Rodríguez uses a two-factor econometric model and orthogonal returns to isolate US direct market risk and true diversification. He finds that, in general, BRIC ETFs offer better true diversification value and are less exposed to true US market risk than CEFs. <b>TOPICS:</b>Mutual fund performance, exchange-traded funds and applications

Rules of Thumb versus Industry Glide Paths: Some Bootstrapping Evidence

The authors compare the performance of retirement portfolios using the average glide path of five popular target date funds to general rules of thumb for asset allocation. Surprisingly, the industry average target date fund has similar return and risk as the “120 minus your age rule”. In addition, a simple “140 minus your age rule” produces greater expected savings at retirement and a lower failure rate for average US investors retiring in their early 60s. A naive approach such as the “120 minus your age” rule or the “140 minus your age” can benefit average US employees by reducing transaction costs, improving retirement balances and increasing the probability of a comfortable retirement through an easy-to-understand investing rule. TOPICS:Wealth management, retirement, performance measurement, portfolio construction Key Findings • Rule of thumb asset allocation strategies such as 120 minus your age rule and 140 minus your age rule are superior to the industry average glide path in terms of retirement balances and failure rates. • Target date fund glide paths tend to perform better than rules of thumb only for investors retiring in their late 60s and receiving social security payments or those willing to take a reduction in their retirement income. • Rule of thumb strategies are easy to understand and save transaction costs over an average industry glide path.

Public debt and the world financial market

World public debt has increased by 30% of world GDP between 2007 and 2017. During the same period, the real interest rate on public debt has fallen by roughly 200 basis points, whereas it should have increased by 100 basis points according to previous estimates. This reveals that demand for public debt has increased faster than supply. Where does the increase in savings come from? To answer this question, we construct the world financial market equilibrium to identify the country and agents across countries who increased their saving rate. Using the equality between the sum of private and public saving and investment at the world level, we observed four key phenomena. First, the world investment rate has been slightly increasing during the period, with an impressive shift of investment in China. The investment rate of China was 6% of world GDP in 2007. This jumps to 12% in 2017. Second, during the 2007-2017 period, the world experienced an impressive reduction of global imbalances. The Chinese saving rate increased less than Chinese investment, and the US saving rate increased more than US investment. Third, the increase in the world saving rate came from highly indebted countries before 2007, mostly from the US and southern Europe. The increase in the current accounts of Italy, Spain and Greece (from a negative territory) is the order of magnitude of the increase in the US current account. Fourth, there is no clear relationship between the household saving rate and national government borrowing, thus not confirming the Ricardian equivalence view. Finally, it seems that the factors generating a high net saving rate in China are temporary, whereas the deleveraging of US and southern Europe may be long-lasting. As a consequence, one can expect low interest rates for a long period of time.

Robo-advisors: A substitute for human financial advice?

Using representative US investor data, we investigate whether automated financial advisors, also referred to as robo-advisors, reduce investors’ demand for human financial advice offered by financial service providers. Our results provide a strong negative relationship between using robo-advisors and seeking human financial advice. We show that the substitution effect of robo-advisors is especially driven by investors who fear to be victimized by investment fraud. Our findings suggest that robo-advisors seem to offer a valid alternative for seeking investment advice, especially among those investors who worry about potential conflicts of interest that appear in the context of human financial advice.

ESG integration: value, growth and momentum

This study provides finer-grained results on the financial effectiveness of ESG integration for mainstream active investment styles. We account for firm size, industry and country effects within ESG scores and introduce the concept of ESG risk materiality. Empirical evidence shows that US and European investors can raise their portfolio’s ESG level and increase risk-adjusted performance at the same time. Therefore, we add to the growing demand for sustainable products in the traditional investment industry and overcome the notion of ESG integration being a burden to traditional investment strategies.

Have Investors Paid a Performance Price? Examining the Behavior of ESG Equity Funds

The academic and practitioner literature provides a variety of contradicting theories as to expected consequences of environmental, social, and governance (ESG)-related factors on the risk and return of equity securities. In light of these heterogeneous expectations, this article sets out to empirically investigate the performance characteristics of investable ESG equity funds to assess whether support for a particular direction in performance impact can be found. The dataset comprises index and active equity mutual funds and exchange-traded funds with a US investment focus that indicate the use of ESG factors in their investment process and extends over a period of 15 years (2004–2018). The empirical results are rather mixed. The authors find substantial cross-sectional dispersion in performance among funds. After controlling for style factor exposures, the majority of funds in any of the tested ESG categories does not produce statistically significant positive or negative gross alpha. An industry-based performance contribution analysis reveals that systematic differences in allocations relative to the broad market exist. However, their median contribution to performance is close to zero over time. Overall, return and risk differences of ESG funds can be significant but appear to be mainly driven by fund-specific criteria rather than by a homogeneous ESG factor. As a result, investors would be better served by assessing investment implications on a fund-by-fund basis. TOPICS:ESG investing, mutual fund performance, passive strategies, portfolio theory Key Findings • The majority of environmental, social, and governance (ESG) equity funds in any of the tested categories do not produce statistically significant positive or negative gross alpha. • Systematic differences in industry allocations relative to the broad market exist, but their median contribution to performance is close to zero over time. • Mixed and substantial cross-sectional dispersion in performance among ESG funds suggests that both the direction and magnitude of any risk or return impact is best assessed on a fund-by-fund basis.

Costs and liabilities of US public pension systems in a low-return environment

AbstractIn recent years, a growing number of capital market professionals have projected a low-return environment in US investment portfolios – where returns in most asset classes are expected to drop below historical rates. While these specific forecasts may not fully materialize, it is natural for cyclical investment markets to go through extended periods of lower returns, creating significant risks for public pension systems which rely on investment returns to sustain their long-term solvency and offset budgetary contributions. This paper uses a simulation method to examine the long-term effect of a low-return environment on the unfunded liabilities and contribution costs of US public pension systems while considering the moderating effects of asset allocation strategies, amortization approaches, and contribution policies.

How do US investors perceive the risk of local political corruption? Evidence from acquisition announcement

AbstractThis study examines the impact of local political corruption on investors’ evaluation of firms’ mergers and acquisitions (M&amp;As) in the US. Using the number of corruption convictions of government officials reported by the US Department of Justice, we find that acquirers in more corrupt court districts experience lower acquirer announcement returns, lower combined acquirer and target announcement returns, and are less likely to complete acquisitions. We further find that the relation between local political corruption and acquirer announcement returns is worsened when acquirers operate primarily in the headquarters state. Overall, the results suggest that local political corruption has an adverse impact on investors’ evaluation of a firm’s M&amp;A profitability.

The Role of Future Economic Conditions in the Cross-Section of Stock Returns: Evidence From the US and UK

Our study investigates the explanatory power of future economic conditions on individual stock returns in the US and UK equity markets. We analyse a new trading strategy that is based on rational forecasts of future real activity. In addition, we specifically examine the performance of this trading strategy applied to two different classifications of stocks – procyclical stocks and countercyclical stocks. Our findings indicate a strong persistence in the relationship between returns on pro-cyclical stocks and the business cycle. However, such persistence is not present when moving to counter-cyclical stocks in the US and the UK. From this we suggest that US and UK equity investors who predict future real activity accurately can improve their investment profitability by longing pro-cyclical stocks when they expect future economic conditions to be above the long-run trend and shorting those stocks when future activity is anticipated to be below the steady state.

John Bogle Had It Right: The Benefits of International Diversification Are Limited

Stock index research over long-term periods supports a U-shaped relationship of the total risk to the allocation to foreign stocks (adding foreign equities lowers risk at first then increases it). This study constructs mean–variance efficient frontiers using 28 country exchange-traded funds (ETFs) available to US investors over two periods: 1996–2018 (mostly developed countries) and 2010–2018 (many emerging markets) to determine the optimal global allocation. Over both periods, the US-only ETF had the highest Sharpe ratio. For 1996–2018, the empirical mean–variance “market” portfolio of 17 country ETFs had a 94.5% allocation to the United States, and the minimum-variance portfolio had 56.55% in the United States. Over the 2010–2018 period, the empirical tangent portfolio of 28 country ETFs had a 100% allocation to the United States, and the minimum-variance threshold for efficiency was 52.65%. For both periods, global portfolios based on gross domestic product or market capitalization weights were highly inefficient. Home-country bias may not be a bias at all. Perhaps investors just rationally maximize the return-to-risk trade-off. <b>TOPICS:</b>Wealth management, exchange-traded funds and applications, global markets <b>Key Findings</b> • The empirical “market portfolio” of 28 country ETFs over 2010–2018 shows a 100% allocation to the United States. • The empirical “market portfolio” of 17 country ETFs over 1996–2018 shows a 94.5% allocation to the United States. • Strong US home country bias mean-variance dominates cap- or GDP-weighting in building global index portfolios.

Investment Wars: Contestation and Confusion in Debate About Investment Liberalization

ABSTRACT Questions of investment governance are central to current trade wars. The USA complains of China’s use of restrictions on US investment as a lever to force technology transfer, while China complains of the review of investment in the USA on national security grounds. This article examines the place of these debates about investment liberalization within the trade wars. The focus is on US conduct, as the instigator of the trade wars. I argue that the USA is pursuing diverse and partially inconsistent in relation to investment liberalization. In some contexts, the USA is continuing to pursue the objective of removing impediments to outward investment, which was the principal objective of US investment policy for the decades prior to the Trump administration. In other contexts, the USA is seeking to encourage the repatriation of US outward investment and to regulate inward and outward investment according to ill-defined security rationales. I argue that prevailing materialist accounts of the trade wars struggle to explain these inconsistencies. Instead, I suggest that constructivist political economy provides a more promising explanatory framework. According to this view, inconsistency in policy objectives stems from foundational uncertainty about the nature of the ‘problem’ of investment liberalization.

Climate Corporate Governance: Europe vs. USA?

According to economic literature, climate change is a financial factor: this is the logical premise of the European Directive N. 2014/95/EU requiring disclosure on the policies adopted by big corporations on climate change risks and opportunities. Through disclosure, climate change imprints the contents of directors’ duty of skill and care in Europe. On the contrary, in US there is no federal legislation or SEC regulations specifically on climate disclosure. Absent any binding decision yet, the current assessment of directors’ fiduciary duties under state law does not include consideration of climate change risks and opportunities according to American authors, even though fiduciary duties may evolve. The sole effective tool is the Martin Act. Levels of disclosure of US and EU corporations are therefore already significantly different both in terms of climate risks and opportunities. This situation can drive the financial sector to direct capital to Europe. Institutional investors in US have been trying to increase disclosure through shareholders’ proposals under Rule 14a-8 but these efforts have been recently undermined by the micro-management argument used by SEC. The conclusion is that the market cannot govern climate change by itself: because of regulation, European corporations are better positioned to mitigate the “carbon bubble”. What is at stake is the profitability of American corporations.