The relevance or otherwise of the central bank's balance sheet

This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet. One of the ways in which such asset purchases could influence prices and demand is via portfolio balance effects. We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. Central bank asset purchases have the potential to affect households' choices by changing the composition and return of their asset portfolios. We find that the effect is weak, and that its size depends on how fiscal policy is conducted.That is not to say that the big expansion of central bank balance sheets in recent years has been ineffective. Our finding is rather that the portfolio balance channel evaluated in an environment of normally functioning (though nonetheless incomplete) asset markets is weak. That is not inconsistent with the evidence that large-scale asset purchases by central banks since 2008 have had significant effects, because those purchases were made when financial markets were, to varying extents, dysfunctional. Nonetheless our results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional.     

INVESTING WITH LIQUID AND ILLIQUID ASSETS

We find optimal trading policies for long‐term investors with constant relative risk aversion and constant investment opportunities, which include one safe asset, liquid risky assets, and an illiquid risky asset trading with proportional costs. Access to liquid assets creates a diversification motive, which reduces illiquid trading, and a hedging motive, which both reduces illiquid trading and increases liquid trading. A further tempering effect depresses the liquid asset's weight when the illiquid asset's weight is close to ideal, to keep it near that level by reducing its volatility. Multiple liquid assets lead to portfolio separation in four funds: the safe asset, the myopic portfolio, the illiquid asset, and its hedging portfolio.     

Education and the empowerment of women in household decision‐making in Spain

It was analysed whether investment in the education of both women and men serves to empower wives resulting in more balanced household decisions being taken on matters related to consumption and financial management. They considered that household decision‐making could be made by mainly the wife, mainly the husband or the couple acting jointly. They then applied multinomial probit models to the Spanish Living Conditions Survey of 2010. Results show that, when controlling for demographic, family and labour market characteristics, the level of education of both the husband and wife has a positive effect in terms of a more egalitarian decision‐making process in relation to three areas of expenditure: daily shopping, expensive purchases of consumer durables and significant expenditure on children. However, only women's education has a positive effect on borrowing money and no effect of education is observed with regard to the use of savings. Results are less conclusive for households where decisions are taken primarily by the wife or husband, since men's education increases the role of husbands in the household making‐decision process whereas no effect of wives' education is observed.     

THE NUMÉRAIRE PROPERTY AND LONG‐TERM GROWTH OPTIMALITY FOR DRAWDOWN‐CONSTRAINED INVESTMENTS

We consider the portfolio choice problem for a long‐run investor in a general continuous semimartingale model. We combine the decision criterion of pathwise growth optimality with a flexible specification of attitude toward risk, encoded by a linear drawdown constraint imposed on admissible wealth processes. We define the constrained numéraire property through the notion of expected relative return and prove that drawdown‐constrained numéraire portfolio exists and is unique, but may depend on the investment horizon. However, when sampled at the times of its maximum and asymptotically as the time‐horizon becomes distant, the drawdown‐constrained numéraire portfolio is given explicitly through a model‐independent transformation of the unconstrained numéraire portfolio. The asymptotically growth‐optimal strategy is obtained as limit of numéraire strategies on finite horizons.     

RISK HORIZON AND REBALANCING HORIZON IN PORTFOLIO RISK MEASUREMENT

This paper analyzes portfolio risk and volatility in the presence of constraints on portfolio rebalancing frequency. This investigation is motivated by the incremental risk charge (IRC) introduced by the Basel Committee on Banking Supervision. In contrast to the standard market risk measure based on a 10‐day value‐at‐risk calculated at 99% confidence, the IRC considers more extreme losses and is measured over a 1‐year horizon. More importantly, whereas 10‐day VaR is ordinarily calculated with a portfolio’s holdings held fixed, the IRC assumes a portfolio is managed dynamically to a target level of risk, with constraints on rebalancing frequency. The IRC uses discrete rebalancing intervals (e.g., monthly or quarterly) as a rough measure of potential illiquidity in underlying assets. We analyze the effect of these rebalancing intervals on the portfolio’s profit and loss distribution over a risk‐measurement horizon. We derive limiting results, as the rebalancing frequency increases, for the difference between discretely and continuously rebalanced portfolios; we use these to approximate the loss distribution for the discretely rebalanced portfolio relative to the continuously rebalanced portfolio. Our analysis leads to explicit measures of the impact of discrete rebalancing under a simple model of asset dynamics.     

MUTUAL FUND PORTFOLIO CHOICE IN THE PRESENCE OF DYNAMIC FLOWS

We analyze the implications of dynamic flows on a mutual fund's portfolio decisions. In our model, myopic investors dynamically allocate capital between a riskless asset and an actively managed fund which charges fraction‐of‐fund fees. The presence of dynamic flows induces “flow hedging” portfolio distortions on the part of the fund, even though investors are myopic. Our model predicts a positive relationship between a fund's proportional fee rate and its volatility. This is a consequence of higher‐fee funds holding more extreme equity positions. Although both the fund portfolio and investors' trading strategies depend on the proportional fee rate, the equilibrium value functions do not. Finally, we show that our results hold even if investors are allowed to directly trade some of the risky securities.     

The Role of Independent Expert Reports in Australian M&A Market

This paper examines the role of independent expert reports in Australian M&A market. Using a comprehensive sample of 2888 transactions between 1991 and 2013, I find that a “neither fair nor reasonable” opinion forces the acquirer to increase the offer premium by 5%, ceteris paribus. The finding remains robust after controlling for the target's bargaining power measured by the residual values of initial premiums that are not explained by observable firm‐deal characteristics. The target that has a weak bargaining position tends to receive less effect of an unfavorable report. In addition, a “fair and reasonable” opinion increases the probability of success, while the unfavorable report does not affect the transaction outcome. I identify the causal effect of expert opinions by differences‐in‐differences analysis using the Duke case decision.     

A NOTE ON THE QUANTILE FORMULATION

Many investment models in discrete or continuous‐time settings boil down to maximizing an objective of the quantile function of the decision variable. This quantile optimization problem is known as the quantile formulation of the original investment problem. Under certain monotonicity assumptions, several schemes to solve such quantile optimization problems have been proposed in the literature. In this paper, we propose a change‐of‐variable and relaxation method to solve the quantile optimization problems without using the calculus of variations or making any monotonicity assumptions. The method is demonstrated through a portfolio choice problem under rank‐dependent utility theory (RDUT). We show that this problem is equivalent to a classical Merton's portfolio choice problem under expected utility theory with the same utility function but a different pricing kernel explicitly determined by the given pricing kernel and probability weighting function. With this result, the feasibility, well‐posedness, attainability, and uniqueness issues for the portfolio choice problem under RDUT are solved. It is also shown that solving functional optimization problems may reduce to solving probabilistic optimization problems. The method is applicable to general models with law‐invariant preference measures including portfolio choice models under cumulative prospect theory (CPT) or RDUT, Yaari's dual model, Lopes' SP/A model, and optimal stopping models under CPT or RDUT.     

THE INCENTIVES OF HEDGE FUND FEES AND HIGH‐WATER MARKS

Hedge fund managers receive a large fraction of their funds' profits, paid when funds exceed their high‐water marks. We study the incentives of such performance fees. A manager with long‐horizon, constant investment opportunities and relative risk aversion, chooses a constant Merton portfolio. However, the effective risk aversion shrinks toward one in proportion to performance fees. Risk shifting implications are ambiguous and depend on the manager's own risk aversion. Managers with equal investment opportunities but different performance fees and risk aversions may coexist in a competitive equilibrium. The resulting leverage increases with performance fees—a prediction that we confirm empirically.     

Chief executive officers' dispositional optimism,host country's rule of law,and foreign market equity mode choice of Ghanaian small and medium‐sized enterprises

Despite a growing interest in the influence of managerial characteristics on firms' strategic decision‐making process, scholarly knowledge is limited with regard to how and when psychological attributes of executives affect firms' foreign entry mode decision. Building on behavioral decision‐making theory, we address this gap by investigating the effect of chief executive officers' (CEOs') optimism on firms' foreign market equity mode choice. In addition, we examine the moderating influence of the host country's rule of law on this relationship. Using primary data from 227 small and medium‐sized enterprises (SMEs) in Ghana, we found that increases in the levels of CEOs' optimism are related to the increases in preference for equity entry mode. This relationship is amplified when CEOs perceive the host country to have stronger rule of law. The findings have theoretical, managerial, and policy implications for SMEs' foreign market entry mode strategy.     

The investment nature of income trusts and their role in diversified portfolios

We examine the investment characteristics of income trusts to explore their role within a portfolio as well as to clarify the on‐going political debate surrounding income trusts. Results show that income trusts exhibited risk‐adjusted performance that far outperformed equities and bonds during our sample period. We adopt a multifactor return generating process for ex‐post income trust returns to quantify the degree to which they are influenced by bond‐ and stock‐related effects. The relationship between trust returns and bond returns is very weak, whereas the relationship between trust returns and stock returns is quite strong. We conclude that while income trusts appear indistinct from equities as an asset class, they significantly expand the efficient set. Copyright © 2007 ASAC. Published by John Wiley & Sons, Ltd.     

Japan's Negative Risk Premium in Interest Rates: The Liquidity Trap and the Fall in Bank Lending

Japan's interest rates have been compressed toward zero because of pressure coming through the foreign exchanges. Twenty years of current‐account surpluses have led to a huge buildup of claims – mainly dollars – on foreigners. Because of ongoing fluctuations in the yen/dollar exchange rate, Japanese financial institutions will only willingly hold these dollar claims if the nominal yield on them is substantially higher than on yen assets. In the 1990s to 2002 as US interest rates have come down, portfolio equilibrium has been sustained only when nominal interest rates on yen assets have been forced toward zero. One consequence is the now infamous liquidity trap for Japanese monetary policy. A second consequence is the erosion of the normal profit margins of Japan's commercial banks, leading to a slump in new bank credit and an inability to grow out of the overhang of old bad loans.     

Subcontracting bargaining power and the trade policy

In this paper, we consider that the split of surplus from a subcontracting deal depends on the relative bargaining powers of domestic and foreign firms. The finding shows that a domestic optimal export policy is a tax (subsidy) if the bargaining power of the domestic firm is sufficiently small (large). We also demonstrate that a domestic firm’s higher bargaining power increases (may decrease) domestic profit if the export policy is exogenous (endogenous). In the presence of an outsider option, the domestic optimal export policy will be threatened by the outsider option if the domestic firm’s bargaining power is sufficiently small, and thus a large bargaining power increases the optimal export tax. At the same time, the foreign firm may still subcontract to the domestic firm even if the domestic firm has a higher total marginal cost of the intermediate good than the outsider option.     

RISK‐AVERSION,OPTIMAL LEVERAGE AND THE INVESTMENT–UNCERTAINTY RELATION

We develop a partial equilibrium dynamic model in which firms are risk‐averse. We analyse the determinants of the investment–uncertainty relationship by means of numerical techniques. When firms can borrow ‘outside’ resources at the riskless rate, an increase in price volatility depresses investment for realistic parameter values. In our model, portfolio considerations play an important role. When the marginal revenue of capital becomes more uncertain, the risk‐averse firm's owners reduce their ‘short position’ in the risk‐free asset, thus diminishing the firm's debt level. The contraction in leverage reduces the expected returns on investment because the expected marginal revenue product is higher than the user cost of capital. In turn, the reduction in expected yields tends to depress investment.     

Family Decision Making and Resource Protection Adequacy

This study examines the correlation between resource protection and the intrahousehold distribution of bargaining power. Using data from the Health and Retirement Study, the analysis quantifies potential changes in the surviving individual's living standard to evaluate the adequacy of resource protection. Individuals who generate a larger share of family income, are more financially knowledgeable, or have the “final say” in family decisions leverage their bargaining power to secure higher protection of their hypothetical widowhood living standard. Consequently, spouses with more bargaining power are less likely to experience declines of their living standard in the event of their spouse passing away and are more likely to be overprotected.     

Portfolio selection with skewness in emerging market industries

In the presence of skewness, portfolio selection requires to consider competing and conflicting objectives. We utilize polynomial goal programming to determine the optimal portfolio from emerging markets industries. This paper is concerned with an industry level analysis of the effects of portfolio selection when the skewness is taken into account. We have found that the incorporation of skewness into an investor's portfolio decision provokes a great change in the resulting optimal portfolio allocation. This evidence suggests that individuals trade expected return for skewness.     

An Exact Test of the Improvement of the Minimum Variance Portfolio

I propose an exact finite sample test of the risk reduction of the global minimum variance (GMV) portfolio. The GMV test statistic is proportional to the reduction in the variance of the GMV portfolio and has a straightforward geometric and portfolio interpretation and complements the celebrated GRS test in Gibbons et al. (1989). In practical applications, the GMV test leads to a rejection of the null hypothesis of no improvement in the GMV portfolio more often than the GRS test rejects the null hypothesis of no improvement in the risk‐return profile of the tangent portfolio. The power of the GMV test increases with the variance reduction of the GMV portfolio. Using test asset returns scaled by predetermined predictive variables is equivalent to increasing the overall number of test assets and leads to substantial power gains.     

Initiating Negotiations: The Role of Machiavellianism, Risk Propensity, and Bargaining Power

Initiation is an often-overlooked yet essential stage of the negotiation process. This study examined the effects of two measures of personality—Machiavellianism and risk propensity—and relative bargaining power (as based on multiple situational factors) on three phases of the initiation process—engaging a counterpart, making a request, and optimizing the request. Using a multi-scenario approach, one hundred fifteen participants indicated their initiation preferences for three distinct negotiations. The results of repeated measures ANOVAs indicate that bargaining power influences an individual’s decision to initiate negotiations. In addition, those high in Machiavellianism choose to initiate negotiations even when relative bargaining power is low, whereas those high in risk propensity tend to optimize their requests. The implications of these findings for practitioners and future research are discussed.     

General equilibrium pricing of nonredundant forward contracts

We derive the general equilibrium of a dynamic financial market in which the investors' opportunity set includes nonredundant forward contracts. We show that Breeden's (1979) consumption‐based CAPM equation for forward contracts contains an extra term relative to that for cash assets. We name this term a strategy risk premium. It compensates investors for the (systematic) risk that stems from their very portfolio strategies when the latter involve nonredundant forward contracts. We also show that Merton's (1973) multibeta intertemporal CAPM must be amended for forward contracts to exhibit adjusted risk premia for the market portfolio and all relevant state variables, as opposed to the usual risk premia for cash assets. Our results are shown not to depend on the usual cash‐and‐carry relationship, which, in general, does not hold. We, nevertheless, provide a well‐known special case where it does hold, albeit not grounded on the usual no‐arbitrage argument. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:817–840, 2003     

Who should sell stocks?

Never selling stocks is optimal for investors with a long horizon and a realistic range of preference and market parameters, if relative risk aversion, investment opportunities, proportional transaction costs, and dividend yields are constant. Such investors should buy stocks when their portfolio weight is too low and otherwise hold them, letting dividends rebalance to cash over time rather than selling. With capital gains taxes, this policy outperforms both static buy‐and‐hold and dynamic rebalancing strategies that account for transaction costs. Selling stocks becomes optimal if either their target weight is low or intermediate consumption is substantial.