Asset allocation under stochastic interest rate with regime switching

We investigate an optimal asset allocation problem in a Markovian regime-switching financial market with stochastic interest rate. The market has three investment opportunities, namely, a bank account, a share and a zero-coupon bond, where stochastic movements of the short rate and the share price are governed by a Markovian regime-switching Vasicek model and a Markovian regime-switching Geometric Brownian motion, respectively. We discuss the optimal asset allocation problem using the dynamic programming approach for stochastic optimal control and derive a regime-switching Hamilton–Jacobi–Bellman (HJB) equation. Particular attention is paid to the exponential utility case. Numerical and sensitivity analysis are provided for this case. The numerical results reveal that regime-switches described by a two-state Markov chain have significant impacts on the optimal investment strategies in the share and the bond. Furthermore, the market prices of risk in both the bond and share markets are crucial factors in determining the optimal investment strategies.     

Optimal Controls for a Large Insurance Under a CEV Model: Based on the Legendre Transform-Dual Method

The purpose of this paper is to consider the optimal proportional reinsurance and investment strategies for an insurance company. The insurer’s surplus process is approximated by a Brownian motion with drift. The insurance company can purchase proportional reinsurance and invest the surplus in a financial market which includes one risk-free asset and one risky asset whose price is modeled by a CEV model. The primary problem is changed to the dual problem by implying Legendre transform. When the objective of the insurance company is to maximize the expected logarithmic utility from terminal wealth, the closed-form expressions for the optimal reinsurance-investment policy which is different to the Merton case to the primal optimal problem are obtained and numerical simulations are provided to demonstrate our results. Moreover, we find an interesting result that risk exposure is non-monotonic in the cost of reinsurance.

     

Financial Markets and Stochastic Growth

The authors study the effect of financial markets on the investment of a two-good two-country economy with stochastic production in a dynamic framework. Each country produces and invests only one good and, therefore, makes decisions as a central planner in an optimal growth model. Trade between consumers of both countries, however, takes place on competitive (spot or financial) markets. The authors compare the investment–consumption decisions of both "market" models with the benchmark case of an integrated world-equilibrium. In the log-linear case, it is possible to uniquely characterize the state-dependent preferences of consumers that lead to dynamically efficient investment decisions. It is shown that the investment decisions in both "market" models are, in general, inefficient compared with the efficient, or integrated world economy, case.     

货币契约、金融功能与经济发展

本文从交换的角度出发,认为货币是一种为了节约交易费用而设计的载有对社会资源支配权的契约。契约的目的是保障货币作为一种有效率的交换媒介,从而降低交易成本。从契约这一视角理解货币可以发现金融系统有三项重要功能:组织社会资源进行生产、调节消费与投资的比例和风险管理。笔者基于金融系统对消费投资比例的调节功能,通过构建模型说明,发展中国家可以通过完善市场机制和金融系统功能,借助市场的力量实现投资与消费的最优比例,从而使经济得到最优的发展。     

不完全市场、惩罚函数及一般均衡

不完全市场一般均衡分析框架使我们更加了解现实金融市场中资产价格的形成机制,使用带有惩罚函数的同伦跟踪算法计算不完全市场经济一般均衡模型均衡(GEI),有效地克服了由于市场不完全引起的消费者资产组合无限扩张和需求函数不连续等传统GEI模型计算所固有的困难.     

DYNAMIC ASSET ALLOCATION AND CONSUMPTION CHOICE IN INCOMPLETE MARKETS*

We study the optimal investment and consumption problem of a CRRA investor when the drift and volatility of the stock are driven by a correlated factor. The myopic and non‐myopic components of the optimal portfolio process are characterised in terms of the market price of traded and non‐traded risk of the minimax martingale measure. We find that the optimal policies depend crucially on the nature of the agent, aggressive versus conservative, and the market incompleteness, improving versus deteriorating investment opportunities. Furthermore, we show that the original problem cannot be decomposed into a pure consumption and a pure terminal wealth problem, unless the market is complete.     

房屋拆迁与家庭金融风险资产投资

文章基于心理账户和资源保存理论,利用2011年中国家庭金融调查数据,考察了房屋拆迁对家庭金融风险资产投资的影响及其机制.研究结果表明,房屋拆迁显著增强了家庭投资金融风险资产的意愿,提高了家庭在金融风险资产上的投资比重.财富损失预期在房屋拆迁影响家庭金融风险资产投资中起了显著的中介作用,而这一中介效应受到社会保险的正向调节.文章从经济学、管理学和心理学相融合的视角进行分析,为人类经济行为和结果提供了新见解;同时,研究结论对拓宽居民家庭投资渠道、深化金融体制改革和促进经济增长具有重要的参考价值和指导意义.     

Active investment strategies in the Spanish futures market: a solution to avoid data snooping bias

This article provides a solution to avoid the data snooping problem in the implementation of active investment strategies in the Spanish financial futures markets. The work sets out to evaluate the results obtained with optimum active investment strategies, grounded in the use of exponential moving averages, and to determine their consistency in periods subsequent to those for which they were obtained. To this end, prices were used with data of different time frequencies, different periods for calculating moving averages and different time ranges. In global terms, the differences between the yield of these active strategies and those of a passive nature are statistically significant. The weak efficient market hypothesis is, therefore, rejected for trading in futures on the IBEX-35 stock market index.     

Long-term investment with stochastic interest and inflation rates: The need for inflation-indexed bonds

We examine the long term investment problem, under stochastic interest and inflation rates and within financial market incompleteness. Four basic financial assets are available on the financial market: a money market account (the cash), a real consumption good, a financial stock index and a bond with constant maturity. In this incomplete framework, we provide the general solution of the expected utility maximization. We compute the monetary loss from not having access to an inflation-indexed bond, in order to be hedged against the inflation risk. We show that this latter one usually reaches high levels (more than 1% per year). Thus, the magnitude of such costs reaches those of management fees or transaction costs. They highlight the significant value of introducing inflation-indexed bonds in the financial markets.     

A possibilistic portfolio adjusting model with new added assets

In order to fit changes in financial markets, portfolio managers often need to revise an existing portfolio. This article analyzes the portfolio adjusting problem with new added assets. We propose a possibilistic portfolio adjusting model with transaction costs and bounded constraints on holdings of assets, which can be transformed into a linear programming problem. Both the lower bounds on holdings and the total investment constraints influence the optimal portfolio adjusting strategies. Furthermore, a numerical example of a portfolio adjusting problem is given to illustrate our proposed effective approaches. The numerical results show the case that investors do not need to invest total capital and to hold all assets in the portfolio for some required return levels.     

Optimization for a Financial Market with Jumps by Lagrange's Method

A Lagrange multiplier was introduced by Chow in 1997 to give a set of necessary conditions for optimal control with respect to a general continuous stochastic differential system. Many applications to the continuous financial markets were derived. Inspired by Chow's idea, this paper introduces a Lagrange multiplier to derive rigorously some necessary conditions for optimal control with respect to stochastic differential systems with jumps. The results reduce to Chow's case for continuous systems. An application to optimal consumption for the financial market with jumps is provided.     

Further evidence on international Islamic and conventional portfolios diversification under regime switching

This article investigates the comparative performance of International Islamic and conventional portfolio diversification across different financial market regimes and provides an optimal choice from an American investor’s viewpoint during the period 2002–2014. Using a bootstrap-based stochastic dominance (SD) test and monthly MSCI prices of Islamic stock market indices and their conventional counterparts in 38 countries from North and Latin America, Europe and Asia-Pacific regions, we find that SD relationships between Islamic and conventional optimal-diversified portfolios change systematically according to investment region and market regime. Essentially, for all regimes, US investors are indifferent between Islamic diversification and its conventional counterpart, which implies that arbitrage diversification opportunities are rare and short lived in all regions. However, across all regions, especially in a crisis regime, Islamic portfolio diversification can be a good substitute for conventional diversification. Islamic portfolio diversification in North and Latin America, Europe and Global regions is an optimal choice for the risk-averse American investors. Finally, results imply that portfolio diversification among Islamic market indices can be a good hedge, offering investors superior investment alternatives during any financial meltdown or economic slowdown due to the conservative nature of Sharia-compliant investments.     

Optimal Dynamic Trading Strategies

This article presents a straightforward technique for computing solutions to discrete, multi-period consumption/investment problems. It solves for the optimal stochastic consumption plans, as well as the optimal dynamic trading strategies that maximize utility for an individual. The technique permits general utility functions that may or may not be time-separable. It also allows general changes in the investment opportunity set and allows the user to impose upper and lower bounds on trading behaviour. Divergent borrowing and lending rates can be handled, as can stochastic labour income risks. Computed solutions verify the predictions of well-known intertemporal works by Merton, Breeden and others.
J.E.L.:G13).     

Financial market and housing wealth effects on consumption: a permanent income approach

The objective of this study is to examine the financial market and housing wealth effects on consumption. Housing has the dual functions as both a commodity yielding a flow of housing services and an investment asset yielding a flow of capital income. With the construction of an empirical framework based on the vector autoregression approach, the findings from this study suggest that a rise in housing price has both a positive wealth effect and a negative price effect on consumption. While the positive wealth effect is caused by an increase in capital income, the negative price effect is caused by an increase in the cost of housing services. In addition, the housing market wealth effect increases, at the expense of the price effect, with the level of housing-market leverage. These findings imply that the government policy of land supply aiming to stimulate the economy should strike a balance between the possible wealth and price effects of the housing market.     

Shouldn't all eggs be putted in one basket? A portfolio model based on investor sentiment and inertial thinking

In the portfolio choice literatures and the financial market, diversification and concentration are the focus of debate of philosophers. In this paper, we develop a model of portfolio choice to integrate the diversification strategy and the concentration strategy. Our model relies on the concepts of investor sentiment and inertial thinking. The results show that: Generally, when the level of sentiment is relatively low, an investor who is affected by sentiment and inertial thinking may do a well-diversified investment the same as the rational investor. When the level of sentiment is high enough, the investment strategies including diversification and concentration are complex and volatile. Quantitative results for either diversification or concentration investment are given for all cases in the paper.     

Lifetime consumption and investment: Retirement and constrained borrowing

Retirement flexibility and inability to borrow against future labor income can significantly affect optimal consumption and investment. With voluntary retirement, there exists an optimal wealth-to-wage ratio threshold for retirement and human capital correlates negatively with the stock market even when wages have zero or slightly positive market risk exposure. Consequently, investors optimally invest more in the stock market than without retirement flexibility. Both consumption and portfolio choice jump at the endogenous retirement date. The inability to borrow limits hedging and reduces the value of labor income, the wealth-to-wage ratio threshold for retirement, and the stock investment.     

Multi-period Markowitz's mean–variance portfolio selection with state-dependent exit probability

This paper considers a multi-period mean–variance portfolio selection problem with uncertain time-horizon in a regime-switching market, where the conditional distribution of the time-horizon is assumed to be stochastic and depends on the market states as the returns of risky assets do. Existence of the optimal investment strategy is analyzed, and the closed-form expressions for the optimal investment strategy and the efficient frontier are derived. In addition, some interesting properties of the efficient frontier are illustrated by numerical analysis and by comparing with the efficient frontier of the case where the distribution of the uncertain time-horizon does not depend on market states.     

Infinite horizon CAPM equilibrium

Summary. This paper derives the equilibrium of an infinite-horizon discrete-time CAPM economy in which agents have discounted expected quadratic utility functions. We show that there is an income stream obtainable by trading on the financial markets which best approximates perfect consumption smoothing (called the {\it least variable income stream} or LVI) such that the equilibrium consumption of each agent is some multiple of the LVI and some share of aggregate output. The welfare of agents is a decreasing function of the lack of consumption smoothing achievable, measured by the distance of the LVI from the perpetuity of one unit of income for ever. If in addition the economy has a Markov structure, the LVI, and hence the equilibrium, can be calculated by dynamic programming. When the model is calibrated to US data a striking prediction emerges: the quasi-irrelevance of the bond market. Infinitely-lived agents achieve almost all their desired consumption smoothing by applying carryover strategies to equity, the proportion of agents' portfolios in bonds rarely exceeding 3%.     

Optimal investment and consumption with return predictability and execution costs

We provide a closed-form solution to an optimal investment and consumption problem for a constant absolute risk aversion (CARA) agent, who faces execution costs when trading correlated risky assets with return predictability. The optimal investment strategy indicates that the agent should trade gradually toward a dynamic aim portfolio, which is an adjusted Merton portfolio with modifications to account for the persistence of the return-predicting signals and the execution costs. The optimal consumption strategy is quadratic in the return-predicting signals and linear in the agent's wealth. Our numerical studies show that the execution costs diminish the importance of asset return predictability on the agent's optimal investment strategy, thereby confirming the conjecture raised by Liu (2004). In addition, the presence of the intermediate consumption leads to a more aggressive aim portfolio than the case without consumption.     

Increasing Wealth and Increasing Instability: The Role of Collateral

In development economics, growth in credit is generally associated with faster long-run growth as financial intermediation improves the efficiency of channeling capital to productive investment. Yet, among developing countries high growth in credit almost always guarantees the outbreak of a financial crisis. The authors attempt to reconcile the two seemingly contradictory facts with an endogenous growth model in which entry to international borrowing entails some significant fixed cost. The poorest countries are excluded from international borrowing because of the fixed cost. The higher-income developing countries will find it optimal to sink the fixed cost to borrow internationally, growing faster as a result, but also become prone to fluctuations arising from shocks to the international financial market.