Correlations and volatility spillovers across commodity and stock markets: Linking energies,food, and gold

This paper employs a VAR-GARCH model to investigate the return links and volatility transmission between the S&P 500 and commodity price indices for energy, food, gold and beverages over the turbulent period from 2000 to 2011. Understanding the price behavior of commodity prices and the volatility transmission mechanism between these markets and the stock exchanges are crucial for each participant, including governments, traders, portfolio managers, consumers, and producers. For return and volatility spillover, the results show significant transmission among the S&P 500 and commodity markets. The past shocks and volatility of the S&P 500 strongly influenced the oil and gold markets. This study finds that the highest conditional correlations are between the S&P 500 and gold index and the S&P 500 and WTI index. We also analyze the optimal weights and hedge ratios for commodities/S&P 500 portfolio holdings using the estimates for each index. Overall, our findings illustrate several important implications for portfolio hedgers for making optimal portfolio allocations, engaging in risk management and forecasting future volatility in equity and commodity markets.     

A risk index to model uncertain portfolio investment with options

This paper models the portfolio investment performance with options by using a risk index, which is defined as the average loss below the risk-free interest rate. Using a risk-free interest rate as the uniform reference rate for all portfolios, the risk index offers an easier-to-compare loss value than the value-at-risk return, where portfolio specific references are used to calculate the average losses. Besides, uncertainty theory is used in the paper to derive the portfolio decision when stock prices are subject to experts' estimations. By analytical computation and empirical analysis, we find that portfolios considering options generate better return than the ones without options. The empirical analysis reveals that the options can effectively hedge the risk, and the call option with a higher exercise price offers higher return per unit of option premium. Furthermore, our proposed model produces higher expected return in most cases than the model where the risk is measured by the chance of the total return failing to reach the threshold level of return.     

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.

     

Behavioral Factors in Equity Allocation Decisions: A Large-Scale Experimental Study With Context

Traditional models of rational behavior struggle to explain how individuals allocate their money over a variety of financial instruments, including annuities, the stock market, and risk-free bonds. This study uses a large and diverse data set from an investment experiment that is rich in context and captures some important features of actual financial decision making. The focus of the article is to build on the literature documenting behavioral explanations for investment choices by studying the equity allocation decision across different financial tools. The authors find evidence that risk aversion, inertia, and excessive extrapolation are associated with investment behavior even when it is clear that return rates are independent across decision-making periods. Further, subjects have an asymmetric response to positive versus negative returns. In addition to having a novel experimental design, the authors also examine behavior before and after the recent financial crisis. The authors find that the financial crisis indirectly affects the first-stage annuity take-up rate in the experiments vis-à-vis a higher average level of risk aversion after the start of the crisis.     

基于FIGARCH模型的中国房地产指数的实证分析

在T分布和正态分布假设下采用GARCH模型和FIGARCH模型对上证地产股指数日收益率序列进行建模分析,结果表明,上证地产股指数日收益率序列的波动具有显著的长记忆性,表明外部冲击对波动有着长期的影响。因此,采用FIGARCH模型建模的效果优于采用GARCH模型建模的效果,并且在T分布假设下拟合模型,其效果优于在正态分布假设下拟合的模型。     

Oil Price Shocks and Volatility in Australian Stock Returns

This paper examines the effect of oil shocks on return and volatility in the sectors of Australian stock market and finds significant effects for most sectors. For the overall market index, an increase in oil price return significantly reduces return, and an increase in oil price return volatility significantly reduces volatility. An advantage of looking at sector returns rather than a general index of stock returns is that sectors may well differ markedly in how they respond to oil price shocks. The energy and material sectors (as expected) and the financial sector (surprisingly) are out of step (in different ways) with results for the other sectors and for the overall index. A rise in oil price increases returns in the energy and material sectors and an increase in oil price return volatility increases stock return volatility in the financial sector. Explanation for the negative (positive) association between oil return (oil return volatility) and returns (volatility of returns) in the financial sector must be based on the association via lending to and/or holdings of corporate bonds issued by firms with significant exposure to oil price fluctuations and their speculative positions in oil‐related instruments.     

Riding the Wave of Sentiment: An Analysis of Return Consistency as a Predictor of Future Returns

This article analyzes the degree to which return consistency in the past predicts future returns. I show that consistency is a strong predictive measure for future stock returns. In a portfolio context, positively consistent stocks exhibit positive future risk-adjusted returns, and negatively consistent stocks exhibit negative future risk-adjusted returns. The results are economically and statistically significant over multiple subperiods. Also, odd return behavior persists for nearly two years after portfolio formation. Stocks that have been consistently positive (negative) for longer time horizons have higher (lower) risk-adjusted returns during the followingmonththan those thathavebeenconsistent for shorter time periods. Finally, high consistency enhances momentum when the two factors are allowed to interact. Thus, there appears to be strong path dependence in the momentum effect, and consistency in stock returns appears to be an important component of return predictability.     

Risk Preferences,Production Risk and Firm Heterogeneity*

A new technique is proposed for deriving the risk preference function under production risk and expected utility of profit maximization. The derivation depends on neither a specific parametric form of the utility function nor any distribution of the error term representing production risk. The proposed risk preference function is flexible enough to test different types of risk behavior and symmetry of the output distribution. Furthermore, our production risk specification allows for inputs with positive and negative marginal risk. The econometric model accommodates production risk, risk preferences and firm heterogeneity simultaneously. Norwegian salmon farming data are used as an application.     

Optimal investment and consumption strategies with state-dependent utility functions and uncertain time-horizon

This paper considers the multi-period optimal strategies for an investment-only problem and an investment–consumption problem. The financial market is regime-switching and consists of one risk-free asset and multiple risky assets. The state process of the financial market is modeled by a finite-state Markov chain. Asset returns and utility functions are affected by the states of the financial market. The investment time-horizon is uncertain and exogenous. By adopting the dynamic programming approach, explicit expressions for optimal value functions and optimal investment and consumption strategies are derived. Moreover, some discussions and numerical examples are provided to illustrate our results, which extend some results in the existing literature to more general situations and show some interesting phenomena.     

Optimizing tracking error-constrained portfolios

Active portfolios subject to tracking error (TE) constraints are the typical setup for active managers tasked with outperforming a benchmark. The risk and return relationship of such constrained portfolios is described by an ellipse in traditional mean-variance space and the ellipse’s flat shape suggests an additional constraint which improves the performance of the active portfolio. Although subsequent work isolated and explored different portfolios subject to these constraints, absolute portfolio risk has been consistently ignored. A different restriction – maximization of the traditional Sharpe ratio on the constant TE frontier in absolute risk/return space – is added here to the existing constraint set, and a method to generate this portfolio is explained. The resultant portfolio has a lower volatility and higher return than the benchmark, it satisfies the TE constraint and the ratio of excess absolute return to risk is maximized (i.e. maximum Sharpe ratio in absolute space).     

An analysis of the spillover effects of exchange-traded funds

This article used the Generalized Autoregressive Conditional Heteroscedasticity-Autoregressive Moving Average (GARCH-ARMA) and the exponentially Generalized Autoregressive Conditional Heteroscedasticity-Autoregressive Moving Average (EGARCH-ARMA) models to study the impact of the spillover and the leverage effects on returns and volatilities of stock index and Exchange Trade Fund (ETF) for developed and emerging markets. Previous unexpected returns for developed and emerging markets which have an opposite influence pattern on ETFs’ returns were identified. The spillover effects from returns are excellent for Hong Kong, followed by Singapore. Meanwhile, Taiwan's stock index return was recorded to have a strong negative impact on ETF return. Notably, this article shows that the spillover effects on stock index and ETF volatilities existed with bilateral influences. Despite a strong positive asymmetric volatility effect in Korea's ETF market, the leverage effect appears to play important roles in the explanation of both stock index and ETF returns.     

交易成本对股票价格的影响研究--基于深圳股票市场的经验研究

本文利用Umlauf(1993)方法和事件研究法,研究了证券印花税变化对深市大盘指数以及单只股票的影响,证明了印花税税率下调会提高股票价格指数水平,得到一个显著的正收益率,而上调会降低股票价格指数水平,得到一个显著的负收益率这一结论.表明了印花税可以作为一种调控证券市场的宏观政策工具,并且为这种政策调控提供了一定的数量指导.     

Optimal diversification and risk-taking: a theoretical and empirical analysis

Among the justifications for capital property income received by private households is that it is a ‘return to risk-taking’. However, portfolio diversification provides an obvious means toward the reduction of risk. Moreover, it is widely believed that the wealthier the household, the more diversification it practices: the larger tends to be the proportion of its total portfolio allocated to publicly traded stock, and the larger tends to be the number of individual stock issues included in its portfolio. Using a simple ‘homogeneous securities’ model, explicit functional forms are obtained for both the optimal proportion of the portfolio allocated to stocks, and the optimal number of individual stock issues in the portfolio. Empirical evaluation of these theoretical results, using a dataset derived from the 2004 Survey of Consumer Finances (SCF), lends substantial support to the model. Applying these empirical results, it is found that as household capital wealth increases, expected capital income increases while simultaneously a reasonable risk indicator (the probability of incurring a negative return on the capital portfolio) decreases owing to the higher level of portfolio diversification. This indication casts significant doubt on the ‘return to risk-taking’ justification for capital property income received by wealthy private households.     

T+1 trading mechanism causes negative overnight return

The T+1 trading mechanism is unique in the Chinese stock market, thus providing a natural experimental field to study the trading mechanism and price behaviors. This paper proposes and proves that T+1 trading mechanism causes negative overnight return, the overnight return can serve as a proxy of the T+1 trading mechanism. The paper finds that the overnight return of the Chinese stock market is significantly negative, whereas those under the T+0 trading mechanism, such as China’s stock index futures, Hong Kong stocks, and major international indices, all have around 0 or positive overnight returns. T+1 trading mechanism has greater impacts on stocks with more divergent investor opinions, higher risk, more individual investor percentages, higher arbitrage restrictions, and less liquidity. The T+1 trading mechanism distorts the price generation mechanism of stocks. The paper contributes to the understanding of impact of trading mechanism on stock prices.     

Global idiosyncratic risk moments

We investigate a global cross-sectional relation between idiosyncratic risk moments and expected stock returns by suggesting three global idiosyncratic volatility, skewness, and kurtosis risk factors. We also suggest two global small minus big and high minus low risk proxies for estimating return residuals of the test assets from a global asset pricing model. To perform robustness checks, we suggest other four global risk factors of momentum, leverage, bid-ask spread, and liquidity. We find a significant negative relation between stock portfolio returns and the global moments, and the cross section of stock returns reflects a significant negative price of risk for global idiosyncratic skewness (?0.13%) and idiosyncratic volatility (?1.85%) and a positive and significant price of risk for global idiosyncratic kurtosis. We find that our suggested risk factors are key drivers of risk premia in stock market and are robust to various checks. These factors also can forecast the gross domestic product growth over the sample period.     

Energy portfolio risk management using time-varying extreme value copula methods

This work is concerned with the statistical modeling of the dependence structure between three energy commodity markets (WTI crude oil, natural gas and heating oil) using the concept of copulas and proposes a method for estimating the Value at risk (VaR) of energy portfolio based on the combination of time series models with models of the extreme value theory before fitting a copula. Each return series is modeled by AR-(FI) GARCH univariate model. Then, we fit the GPD distribution to the tails of the residuals to model marginal residuals distributions. The extreme value copula to the iid residuals is fitted and we simulate from it to construct N portfolios and estimate VaR. As a first step, the method is applied to a two-dimensional energy portfolio. In second step, we extend method in trivariate context to measure VaR of three-dimensional energy portfolio. Dependences between residuals are modeled using a trivariate nested Gumbel copulas. Methods proposed are compared with various univariate and multivariate conventional VaR methods. The reported results demonstrate that GARCH-t, conditional EVT and FIGARCH extreme value copula methods produce acceptable estimates of risk both for standard and more extreme VaR quantiles. Generally, copula methods are less accurate compared with their predictive performances in the case of portfolio composed of exchange market indices.     

我国期货价格风险管理研究——基于VaR方法与GARCH-t模型的视角

本文利用我国商品期货及金融期货2010年9月份合约数据采用VaR方法对其收益率序列的波动性进行了检验。研究结果发现:首先,应用GARCH-t模型的方法对期货商品的价格风险进行管理具有显著的有效性和适用性,特别是在95%的置信水平下对收益率波动性的拟合效果最佳,同时该方法对期货商品正收益率的拟合效果比负收益率更好。其次,我国股指期货正式推出后,收益率波动性较模拟交易时期显著变小,表明改进后的交易制度及政府监管等措施可能限制了市场上的过度投机行为。最后,农副产品期货的风险暴露程度比股指、金属和能源化工等期货品种要小。     

REVISED REAL CANADIAN GNP ESTIMATES AND CANADIAN ECONOMIC GROWTH, 1870–1926

Revised Canadian real GNP estimates for the 1870–1926 period, based on the nominal GNP estimates constructed by M. C. Urquhart and on a variety of sector-specific price indexes, are presented below. The construction of this revised real GNP series allows for the creation of real output estimates for the major sectors of the Canadian economy as well as for a new implicit price index series. These revised estimates cast new light on our present understanding of Canadian economic growth and reinforce the view that the Canadian wheat boom probably played an important and positive role in the process of Canadian economic development.     

Risk index based models for portfolio adjusting problem with returns subject to experts' evaluations

This paper discusses a portfolio adjusting problem with additional risk assets and a riskless asset in the situation where security returns are given by experts' evaluations rather than historical data. Uncertain variables are employed to describe the security returns. Using expected value and risk index as measurements of portfolio return and risk respectively, we propose two portfolio optimization models for an existing portfolio in two cases, taking minimum transaction lot, transaction cost, and lower and upper bound constraints into account. In one case the riskless asset can be both borrowed and lent freely, and in another case the riskless asset can only be lent and the borrowing of riskless asset is not allowed. The adjusting models are converted into their crisp equivalents, enabling the users to solve them with currently available programming solvers. For the sake of illustration, numerical examples in two cases are also provided. The results show that under the same predetermined maximum tolerable risk level the expected return of the optimal portfolio is smaller when the riskless asset can only be lent than when the riskless asset can be both borrowed and lent freely.     

Does aggregate uncertainty explain size and value anomalies?

This paper examines the impact of aggregate uncertainty on return dynamics of size and book-to-market ratio sorted portfolios. Using VVIX as a proxy for aggregate uncertainty, and controlling for market risk, volatility risk, correlation risk and the variance risk premium, we document significant portfolio return exposures to aggregate uncertainty. In particular, portfolios that contain small and value stocks have significant and negative uncertainty betas, whereas portfolios of large and growth stocks exhibit positive and significant uncertainty betas. Using a quasi-natural experimental setting around the financial crisis, we confirm the differential sensitivity of small versus big and value versus growth portfolios to aggregate uncertainty. We posit that due to their negative uncertainty betas, uncertainty-averse investors demand extra compensation to hold small and value stocks. Our results offer an uncertainty-based explanation to size and value anomalies.