CVaR HEDGING USING QUANTIZATION‐BASED STOCHASTIC APPROXIMATION ALGORITHM

In this paper, we investigate a method based on risk minimization to hedge observable but nontradable source of risk on financial or energy markets. The optimal portfolio strategy is obtained by minimizing dynamically the conditional value‐at‐risk (CVaR) using three main tools: a stochastic approximation algorithm, optimal quantization, and variance reduction techniques (importance sampling and linear control variable), as the quantities of interest are naturally related to rare events. As a first step, we investigate the problem of CVaR regression, which corresponds to a static portfolio strategy where the number of units of each tradable assets is fixed at time 0 and remains unchanged till maturity. We devise a stochastic approximation algorithm and study its a.s. convergence and weak convergence rate. Then, we extend our approach to the dynamic case under the assumption that the process modeling the nontradable source of risk and financial assets prices is Markovian. Finally, we illustrate our approach by considering several portfolios in connection with energy markets.     

International capital flows

The surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice. We develop the implications of portfolio choice for both gross and net international capital flows in the context of a simple two-country dynamic stochastic general equilibrium (DSGE) model. We focus on the time-variation in portfolio allocation following shocks, and resulting capital flows. Endogenous time-variation in expected returns and risk, which are the key determinants of portfolio choice, affect capital flows in often subtle ways. The model is consistent with a broad range of empirical evidence. An additional contribution of the paper is to overcome the technical difficulty of solving DSGE models with portfolio choice by developing a broadly applicable solution method.     

Credit constraints, equity market liberalizations and international trade

This paper provides evidence that credit constraints are an important determinant of international trade flows. I exploit shocks to the availability of external finance and examine the impact of equity market liberalizations on the export behavior of 91 countries in the 1980-1997 period. I show that liberalizations increase exports disproportionately more in financially vulnerable sectors that require more outside finance or employ fewer collateralizable assets. This result is not driven by cross-country differences in factor endowments and is independent of simultaneous trade policy reforms. Moreover, it obtains with equal strength in the full panel of countries as well as in both panel and event-study analyses of countries which removed capital controls during the sample period. Finally, the effects of liberalizations are more pronounced in economies with initially less active stock markets, indicating that foreign equity flows may substitute for an underdeveloped domestic financial system. Similarly, opening equity markets has a greater impact in the presence of higher trade costs caused by restrictive trade policies.     

Portfolio Flows to Emerging Markets: Prospects,Pitfalls and Policy Implications

ABSTRACT

This paper examines the pattern of debt and equity portfolio flows (FPI) to the developing countries in recent years and discusses some policy and operational measures to facilitate greater FPI flows. Our analysis suggests that many countries need to adopt more aggressive measures to attract foreign portfolio investment. The major areas where improvements can facilitate FPI are identified as: political and legal environment, private sector development, improvement in macro-economic management, development of capital markets, strengthening of financial institutions, enforcement of market regulations, improvements in market operations, and effective dissemination of market information.     

Financial integration and international risk sharing

Conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk. There is little evidence, however, that countries have increased risk sharing despite widespread financial liberalization. We show that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets, while actual markets are far from frictionless: financial contracts are incomplete and contract enforceability is limited. When countries remove official capital controls, default risk is still present as an implicit barrier to capital flows. If default risk were eliminated, capital flows would be six times greater, and international risk sharing would increase substantially.     

基于期权理论的动态证券资产配置策略研究

本文试图通过对基于期权理论的动态证券资产配置策略进行研究,针对中国金融市场的不同行情走势,利用期权理论固定比例投资组合保险策略(CPPI)与时间不变性投资组合保险策略(TIPP)方法,设计保本型产品的投资组合保险策略.该策略以保本为第一考虑,可在保本的基础上,在最大程度上实现参与股市上涨的收益.     

Global capital flows and development: A Survey

Abstract

From a development perspective, capital flows can both provide significant benefits and entail significant costs. Consequently, the development impacts of capital flows do not readily lend themselves to simple generalizations. This survey considers the development benefits and costs of four kinds of capital flows: foreign direct investment, equity portfolio investment, bond finance, and commercial bank lending. The survey suggests that the development impacts of these flows are conditional on both their specific characteristics and the larger policy environments in which they take place. It claims short-term superiority for foreign direct investment and equity portfolio investment over bond finance and commercial bank lending, and offers a set of policy recommendations to make capital flows more development-friendly.     

Patterns of foreign direct investment in poor countries

This paper introduces endogenous adoption costs for productive assets in a Ramsey-type growth model with international capital flows. There are two classes of productive assets: owner-specific and location-specific. Adoption costs are an increasing function of the level of technology embodied in the investor's owner-specific assets and a declining function of the host country's location-specific assets. In this setting, the observed pattern of international capital flows is consistent with diminishing returns to capital. Further, our model predicts that the sectoral allocation of foreign direct investment is similar in rich and poor countries.     

A new perspective on “the new rule”of the current account

In an influential series of contributions, Kraay and Ventura (2000, 2003) offer a “new rule” for the current account: in response to a temporary income shock, the change in the current account is equal to the change in saving times the ratio of net foreign assets to wealth. We analyze the impact of a temporary income shock on the current account in the context of a two-country dynamic general equilibrium model of portfolio choice and show that the new rule does not hold. We also show that the cross-section evidence reported by Kraay and Ventura in favor of the new rule is a feature implied by the steady state of the model that is conceptually distinct from the new rule. We argue that the new rule could only hold in a model with one-way capital flows (only inflows or outflows, but not both), a feature that is strongly counterfactual.     

Risk,external adjustment and capital flows

This paper studies the process of external adjustment. I develop an open economy model with endowment and preference shocks that can account for the empirical behavior of real exchange rates, interest rates and consumption in the U.S. and Europe. The model includes cross border holdings of bonds and equity, and financial frictions that impede international risk-sharing. I find that external adjustment following endowment shocks predominantly takes place via trade flows, consistent with the intertemporal approach to the current account. In contrast, preference shocks that change investors' risk aversion induce adjustment via the trade and valuation channels; where the latter includes the effects of unexpected capital gains and loss on existing cross border holdings and changes in the expected future return differentials between foreign assets and liabilities. The model estimates imply that the valuation channel of external adjustment is more important for the U.S. than the trade channel. Consistent with this implication, I show that forecasts of future return differentials contributed most to the volatility of the U.S. net foreign asset position in the post Bretton-Woods era.     

The impact of sovereign wealth funds on global financial markets

If sovereign wealth funds act similarly to private investors and thus allocate foreign assets according to market capitalisation rather than liquidity considerations, official portfolios reduce their “bias” towards the major reserve currencies — the US dollar and the euro. As a result, more capital flows “downhill“ from rich to less wealthy economies. In this scenario, the euro area and the United States would be subject to net capital outflows while Japan and the emerging markets would attract net capital inflows. The potential implications of a rebalancing of international capital flows for stock prices, interest rates and exchange rates remain uncertain, however. The authors wish to thank Marcel Fratzscher for excellents comments. The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank.     

Diversification potential of Asian frontier,BRIC emerging and major developed stock markets: A wavelet-based value at risk approach

This study examines the portfolio risk and the co-movements between each of the BRIC emerging and South Asian frontier stock markets and each of the major developed stock markets (U.S., UK and Japan), using the wavelet squared coherence approach as well as the wavelet-based Value at Risk (VaR) method. The results show that the co-movements and diversification benefits between these markets vary over time and across frequencies. Additionally, the co-movements are intensified in the wake of the recent global financial crisis (GFC) and the Eurozone sovereign debt crisis (ESDC). More precisely, the wavelet-based VaR ratio indicates that including a BRIC or a South Asian (particularly Pakistan and Sri Lanka at both the short- and long-term) stock market in a portfolio of the developed stock markets reduces the resulting portfolio's VaR. Specifically, adding China in the medium term to this portfolio reduces risk in the pre- and during both the GFC and ESDC periods. By assigning optimal weights to the different market assets in the portfolio formulation, the analysis thus has implications for international investors.     

Zero‐interest Rate Policy and Unintended Consequences in Emerging Markets

Since 2009, central banks in the major advanced economies have held interest rates at very low levels to stabilise financial markets and support the recovery of their economies. This paper outlines the unintended consequences of the prolonged period of very low world funding interest rates in emerging markets. The paper is informed by a Mises–Hayek‐BIS view on credit booms and Mises' law of unintended consequences. Consistent with the presented credit boom view, I provide evidence that the very low world funding interest rates are associated with a rise in volatile capital flows and asset market bubbles in fast‐growing emerging markets. In line with Mises' law, I further show that these unintended consequences give rise to a new wave of interventionism as policymakers in emerging markets increasingly reintroduce financially repressive measures to isolate the economies from foreign capital inflows.     

Consumption and Portfolio Policies With Incomplete Markets and Short-Sale Constraints: the Finite-Dimensional Case1

We use a martingale approach to study optimal intertemporal consumption and portfolio policies in a general discrete-time, discrete-state-space securities market with dynamically incomplete markets and short-sale constraints. We characterize the set of feasible consumption bundles as the budget-feasible set defined by constraints formed using the extreme points of the closure of the set of Arrow-Debreu state prices consistent with no arbitrage, and then establish a relationship between the original problem and a dual minimization problem.     

Surges

This paper examines when and why capital sometimes surges to emerging market economies (EMEs). Using data on net capital flows for 56 EMEs over 1980−2011, we find that global factors, including US interest rates and investor risk aversion act as “gatekeepers” that determine when surges of capital to EMEs will occur. Whether a particular EME receives a surge, and the magnitude of that surge, however, depends largely on domestic factors such as its external financing need, capital account openness, and exchange rate regime. Differentiating between surges driven by exceptional behavior of asset flows (repatriation of foreign assets by domestic residents) from those driven by exceptional behavior of liability flows (nonresident investments into the country), shows the latter to be relatively more sensitive to global factors and contagion.     

CONSUMPTION AND PORTFOLIO POLICIES WITH INCOMPLETE MARKETS AND SHORT-SALE CONSTRAINTS IN THE FINITE-DIMENSIONAL CASE: SOME REMARKS

This paper extends He and Pearson's (1991) martingale approach to the study of optimal intertemporal consumption and portfolio policies with incomplete markets and short-sale constraints to a framework in which no assumptions are made on the price process for the securities. We show how both their characterization of the budget-feasible set and duality result can be extended to account for an unbounded set II of Arrow-Debreu state prices compatible with the arbitrage-free assumption. We also supply a (fairly general) sufficient condition for II to be bounded, as required in their setting.     

Decomposing the Income Insurance Channel across OECD and Emerging Markets

This paper investigates the underlying forces driving income insurance channels for the Organisation for Economic Co‐operation and Development (OECD) and emerging markets. We find income insurance channels across countries to be driven by different subchannels. For the OECD, income insurance is mostly governed by payments for financial liabilities; for the emerging markets, income flows from nationals working abroad constitute the main income smoother. Despite the growth in cross‐border financial asset trading over the years, we could not find evidence of income smoothing via foreign assets receipts for the OECD. For the majority of emerging markets, neither receipts of foreign assets nor foreign liability payments are strong enough to insure income as well.     

Volatility and shock interactions and risk management implications: Evidence from the U.S. and frontier markets

The study affords comprehensive evidence of shock and volatility interactions between stock markets of each of the twenty four frontier markets and the U.S. for the period 2006:01 to 2015:07. The results from the recent EDCC-GARCH model of Nakatani and Teräsvirta (2009), which permits for concurrent estimation of shock and volatility interactions as well as dynamic conditional correlations (DCC) across assets, shows unidirectional shock and volatility transmissions from the U.S. to the frontier markets. The conditional correlation between the U.S. and each frontier market is very low or negative, offering diversification benefits to U.S. investors. The DCC exhibits slow decay and is insignificantly impacted by previous period's shocks. The results are very intuitive for optimal portfolio allocations using the traditional capital-based as well as the risk-based allocations. The risk parity approach to portfolio management increases (reduces) allocations to lower (higher) risk assets to improve portfolio diversification while increasing the risk-adjusted returns.     

Boom‐and‐bust Cycles,External Imbalances and the Real Exchange Rate

When the current account balance and net capital outflows do not exactly offset each other, international payment flows arise. Payment flows into a country push the real exchange rate up, payment outflows push it down. This article uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom‐and‐bust cycles. It shows that during such episodes, capital inflows first exceed the deficit on current account, strengthening the currency. Later on, when the return on domestic capital reverts to its normal level, the current account recovers, yet the overall decline of the net foreign asset position provokes a fall of the real exchange rate even below its initial level. Case studies of countries experiencing rapid economic expansions followed by economic and financial meltdowns confirm the article's theoretical predictions.     

风险态度、金融教育与家庭金融资产选择

文章基于中国城市居民消费金融调查数据,研究了风险态度、金融教育对家庭金融资产选择和家庭金融市场参与的影响。结果发现,风险态度显著影响家庭金融资产组合分散化程度,风险厌恶程度越高,金融资产组合分散化程度越低。风险态度对家庭正规金融市场参与有显著影响,风险厌恶程度的提高会显著降低家庭在股票、基金、债券、储蓄性保险市场的参与概率,风险厌恶程度增加一单位,家庭参与股票市场的可能性会降低10.5%。风险厌恶程度对股票、基金、债券、储蓄性保险资产在家庭金融资产中的比例具有显著的负向影响。家庭的金融教育投入对风险资产持有比重条件分布的影响上,呈先上升后下降趋势,中间分位的要大于两端。文章相应的政策含义是,政府及金融管理部门需要普及金融教育知识,提高居民的金融风险认知水平,从而优化家庭金融资产选择,改善居民金融福利。