Optimal hedge fund portfolios under liquidation risk

We use an expected utility framework to integrate the liquidation risk of hedge funds into portfolio allocation problems. The introduction of realistic investment constraints complicates the determination of the optimal solution, which is solved using a genetic algorithm that mimics the mechanism of natural evolution. We analyse the impact of the liquidation risk, of the investment constraints and of the agent's degree of risk aversion on the optimal allocation and on the optimal certainty equivalent of hedge fund portfolios. We observe, in particular, that the portfolio weights and their performance are significantly affected by liquidation risk. Finally, tight portfolio constraints can only provide limited protection against liquidation risk. This approach is of special interest to fund of hedge fund managers who wish to include the hedge fund liquidation risk in their portfolio optimization scheme.     

A mean/variance approach to long-term fixed-income portfolio allocation

Abstract

Long-term investments in bonds offer known returns, but with risks corresponding to defaults of the underwriters. The excess return for a risky bond is measured by the spread between the expected yield and the risk-free rate. Similarly, the risk can be expressed in the form of a default spread, measuring the difference between the yield when no default occurs and the expected yield. For zero-coupon bonds and for actual market data, the default spread is proportional to the probability of default per year. The analysis of market data shows that the yield spread scales as the square root of the default spread. This relation expresses the risk premium over the risk-free rate that the bond market offers, similarly to the risk premium for equities. With these measures for risk and return, an optimal bond allocation scheme can be built following a mean/variance utility function. Straightforward computations allow us to obtain the optimal portfolio, depending on a pre-set risk-aversion level. As for equities, the optimal portfolio is a linear combination of one risk-free bond and a risky portfolio. Using the scaling law for the default spread allows us to obtain simple expressions for the value, yield and risk of the optimal portfolio.     

Portfolio choice with indivisible and illiquid housing assets: the case of Spain

This paper studies the investment decisions of Spanish households using a unique data-set, the Spanish Survey of Household Finance (EFF). We propose a theoretical model in which households, given a fixed investment in housing, allocate their net wealth across bank time deposits, stocks and mortgage. Besides considering housing as an indivisible and illiquid asset that restricts the portfolio choice decision, we take into account the financial constraints that households face when they apply for external funding. For every representative household in the EFF, we solve this theoretical problem and obtain the theoretically optimal portfolio that is then compared with households’ actual choices. We find that households significantly under-invest in stocks and deposits while the optimal and actual mortgage investments agree. Considering the three types of financial assets at once, we find that the households headed by highly financially sophisticated, older, retired, richer, and unconstrained persons are the ones investing more efficiently.     

Contagion models a la carte: which one to choose?

We propose a copula contagion mixture model for correlated default times. The model includes the well-known factor, copula, and contagion models as its special cases. The key advantage of such a model is that we can study the interaction of different models and their pricing impact. Specifically, we model the default times of the underlying names in a reference portfolio to follow contagion intensity processes with exponential decay coupled with a copula dependence structure. We also model the default time of the counterparty and its dependence structure with the reference portfolio. Numerical tests show that correlation and contagion have an enormous joint impact on the rates of CDO tranches and the corresponding credit value adjustments are extremely high to compensate for the wrong-way risk.     

Portfolio analysis of intraday covariance matrix in the Greek equity market

The intraday nonparametric estimation of the variance–covariance matrix adds to the literature in portfolio analysis of the Greek equity market. This paper examines the economic value of various realized volatility and covariance estimators under the strategy of volatility timing. I use three types of portfolios: Global Minimum Variance, Capital Market Line and Capital Market Line with only positive weights. The estimators of volatilities and covariances use 5-min high-frequency intraday data. The dataset concerns the FTSE/ATHEX Large Cap index, FTSE/ATHEX Mid Cap index, and the FTSE/ATHEX Small Cap index of the Greek equity market (Athens Stock Exchange). As far as I know, this is the first work of its kind for the Greek equity market. Results concern not only the comparison of various estimators but also the comparison of different types of portfolios, in the strategy of volatility timing. The economic value of the contemporary non-parametric realized volatility estimators is more significant than this when the covariance is estimated by the daily squared returns. Moreover, the economic value (in b.p.s) of each estimator changes with the volatility timing.     

Exploring International Investment Through a Classroom Portfolio Simulation Project

A rapid integration of financial markets has prevailed during the last three decades. Investors are able to diversify investment beyond national markets to mitigate return volatility of a “pure domestic portfolio.” This article discusses a simulation project through which students learn the role of international investment by managing their own portfolios. The article explains the project's investment ground rule, trading requirement, and grading rubric. The students are required to examine many important factors in international business such as currency risks and regional policies. The structure of this project can also be applied to a course involving student-managed investment funds.     

中国金融资产收益率与宏观经济相关性研究

基于Lamont设立的经济跟踪指标组合体系,选择1997年5月至2006年11月的数据构建了股市各项资产收益率与宏观经济指标之间的多元OLS回归模型(ETP)、向量自回归模型(VAR)、协整检验和向量误差修正模型(VEC),全面考察了我国股市资产收益率与宏观经济变量之间的互动关系。研究发现,OLS模型与VAR模型中资产收益率的回归系数大多不显著,虽然宏观变量和金融资产收益率存在长期均衡关系,但是这种均衡关系非常松散和不明朗。     

深莞惠城市融合途经探察

随着近年来深莞惠联席会议的多次召开,深莞惠一体化进程逐步加快,同时,建立城市群政府协调机制的必要性也逐渐凸显.本文以组合城市理论为依托,对深莞惠的融合情况进行了梳理,并对深莞惠组合城市的政府协调机制与深莞惠融合的途径提出了对策与建议.     

一种改进的不完全指数复制方法

本文在考虑交易成本和投资组合动态调整的基础上,建立混合整数线性规划模型,引入内核搜索分析框架进行近似求解,并利用沪深300进行实证研究。研究发现,一是相比于基本内核搜索法,增强型内核搜索法仅在基准指数成分股数量很大时才会较大幅度提高求解质量;二是考虑投资组合动态调整的模型不仅更稳健,而且跟踪的继承性和保持性更好,尤其适用于单边市场;三是过度刻画现实交易特征一定程度上会降低不完全指数复制模型的复制和预测效果。     

Robustness checks and robustness tests in applied economics

A common exercise in empirical studies is a “robustness check”, where the researcher examines how certain “core” regression coefficient estimates behave when the regression specification is modified by adding or removing regressors. If the coefficients are plausible and robust, this is commonly interpreted as evidence of structural validity. Here, we study when and how one can infer structural validity from coefficient robustness and plausibility. As we show, there are numerous pitfalls, as commonly implemented robustness checks give neither necessary nor sufficient evidence for structural validity. Indeed, if not conducted properly, robustness checks can be completely uninformative or entirely misleading. We discuss how critical and non-critical core variables can be properly specified and how non-core variables for the comparison regression can be chosen to ensure that robustness checks are indeed structurally informative. We provide a straightforward new Hausman (1978) type test of robustness for the critical core coefficients, additional diagnostics that can help explain why robustness test rejection occurs, and a new estimator, the Feasible Optimally combined GLS (FOGLeSs) estimator, that makes relatively efficient use of the robustness check regressions. A new procedure for Matlab, testrob, embodies these methods.