Dynamic mean–VaR portfolio selection in continuous time

The value-at-risk (VaR) is one of the most well-known downside risk measures due to its intuitive meaning and wide spectra of applications in practice. In this paper, we investigate the dynamic mean–VaR portfolio selection formulation in continuous time, while the majority of the current literature on mean–VaR portfolio selection mainly focuses on its static versions. Our contributions are twofold, in both building up a tractable formulation and deriving the corresponding optimal portfolio policy. By imposing a limit funding level on the terminal wealth, we conquer the ill-posedness exhibited in the original dynamic mean–VaR portfolio formulation. To overcome the difficulties arising from the VaR constraint and no bankruptcy constraint, we have combined the martingale approach with the quantile optimization technique in our solution framework to derive the optimal portfolio policy. In particular, we have characterized the condition for the existence of the Lagrange multiplier. When the opportunity set of the market setting is deterministic, the portfolio policy becomes analytical. Furthermore, the limit funding level not only enables us to solve the dynamic mean–VaR portfolio selection problem, but also offers a flexibility to tame the aggressiveness of the portfolio policy.     

Robust state-dependent mean–variance portfolio selection: a closed-loop approach

Finance and Stochastics - This paper studies a class of robust mean–variance portfolio selection problems with state-dependent risk aversion. Model uncertainty, in the sense of considering...     

Mean–variance and mean–semivariance portfolio selection: a multivariate nonparametric approach

While univariate nonparametric estimation methods have been developed for estimating returns in mean-downside risk portfolio optimization, the problem of handling possible cross-correlations in a vector of asset returns has not been addressed in portfolio selection. We present a novel multivariate nonparametric portfolio optimization procedure using kernel-based estimators of the conditional mean and the conditional median. The method accounts for the covariance structure information from the full set of returns. We also provide two computational algorithms to implement the estimators. Via the analysis of 24 French stock market returns, we evaluate the in-sample and out-of-sample performance of both portfolio selection algorithms against optimal portfolios selected by classical and univariate nonparametric methods for three highly different time periods and different levels of expected return. By allowing for cross-correlations among returns, our results suggest that the proposed multivariate nonparametric method is a useful extension of standard univariate nonparametric portfolio selection approaches.     

On asymptotic properties of Bonus–Malus systems based on the number and on the size of the claims

A general framework for a Bonus–Malus system (BMS) based on the number and the size of the claims is presented, the set of the bonus classes being an interval [a,?b], say 0<a<1<b. The BMS is interpreted as a general Markov chain with state space [a,?b]. It turns out that, under certain assumptions, the Markov chain possesses an invariant limit distribution to which it converges with a geometric rate. We show how the invariant distribution can be evaluated by means of simulation. We also deal with the best possible convergence rate and show how it can be presented by means of the spectral theory of Banach spaces.     

What really happens if the positive definiteness requirement on the covariance matrix of returns is relaxed in efficient portfolio selection?

The Markowitz critical line method for mean–variance portfolio construction has remained highly influential today, since its introduction to the finance world six decades ago. The Markowitz algorithm is so versatile and computationally efficient that it can accommodate any number of linear constraints in addition to full allocations of investment funds and disallowance of short sales. For the Markowitz algorithm to work, the covariance matrix of returns, which is positive semi-definite, need not be positive definite. As a positive semi-definite matrix may not be invertible, it is intriguing that the Markowitz algorithm always works, although matrix inversion is required in each step of the iterative procedure involved. By examining some relevant algebraic features in the Markowitz algorithm, this paper is able to identify and explain intuitively the consequences of relaxing the positive definiteness requirement, as well as drawing some implications from the perspective of portfolio diversification. For the examination, the sample covariance matrix is based on insufficient return observations and is thus positive semi-definite but not positive definite. The results of the examination can facilitate a better understanding of the inner workings of the highly sophisticated Markowitz approach by the many investors who use it as a tool to assist portfolio decisions and by the many students who are introduced pedagogically to its special cases.     

Investor sentiment and the mean–variance relation

This study shows the influence of investor sentiment on the market's mean–variance tradeoff. We find that the stock market's expected excess return is positively related to the market's conditional variance in low-sentiment periods but unrelated to variance in high-sentiment periods. These findings are consistent with sentiment traders who, during the high-sentiment periods, undermine an otherwise positive mean–variance tradeoff. We also find that the negative correlation between returns and contemporaneous volatility innovations is much stronger in the low-sentiment periods. The latter result is consistent with the stronger positive ex ante relation during such periods.     

Impact of the 2008–2009 financial crisis on the external and internal linkages of European frontier stock markets

This study investigates the impact of the 2008–2009 financial crisis on (i) external linkages of European frontier stock markets (Croatia, Estonia, Romania, Slovakia and Slovenia) with the developed equity markets (the US, the UK, and Germany) and (ii) internal linkages within the frontier markets. The results demonstrate that both long- and short-run external linkages were strengthened during the crisis. The analysis of internal linkages reveals strong relationship only between the Croatian and Slovenian markets. However, the other frontier markets in the group were weakly linked, implying that European frontier stock markets may constitute a good alternative source of diversification benefits during crises periods.     

Small sample properties of the GMM specification test based on the Hansen–Jagannathan distance

Following Hansen and Jagannathan (J. Finance 52 (1997) 557), Jagannathan and Wang (J. Finance 51 (1996) 3) propose a distance measure that estimates the maximum pricing error generated by a linear asset model. Jagannathan and Wang propose a test of this HJ-distance using an empirical p-value as an alternative generalized method of moments (GMM) measure to Hansen's (Econometrica 50 (1982) 1029) GMM specification test. Using Monte Carlo analysis, we examine the finite sample properties of these specification tests. While the Hansen test mildly overrejects correct models in commonly used sample size, the empirical p-value of the HJ-distance rejects correct models too severely in such samples to provide a valid test of such models.     

Stock selection based on Morningstar’s ten-year,five-star general equity mutual funds

Recent research suggests that the individual investor can build stock portfolios that outperform broad market indices. Based on this research and on evidence supporting the persistence of mutual fund performance, we test whether or not the individual investor can build market-superior portfolios from stocks selected from the top holdings of Morningstar’s ten-year, five-star general equity mutual funds. We use modern portfolio theory to construct the portfolios. Although the portfolios tend to outperform the S&P 500 for the 1990s, we conclude that the evidence is not strong enough to recommend this stock selection strategy to the individual investor.     

Portfolio Diversification Benefits at Different Investment Horizons During the Arab Uprisings: Turkish Perspectives Based on MGARCH–DCC and Wavelet Approaches

This study is an initial attempt at investigating the extent to which portfolio diversification benefits at different investment horizons are available to a Turkish investor from investment in MENA countries exposed to the Arab spring based on MGARCH-DCC and Wavelet techniques on daily data spanning from 2005 to 2015. The findings tend to suggest that the Turkish investors may not benefit from investment in Egypt for almost all investment horizons but may have moderate benefits from Lebanon up to the investment horizons of 32–64 days and longer. However, Turkish investors may benefit from Oman excepting the longer investment horizons. In the long run, all stock holding periods exceeding 32 days have minimal benefits for portfolio diversification.     

A new efficient method for estimating the Gerber–Shiu function in the classical risk model

In this paper, we propose a new efficient method for estimating the Gerber–Shiu discounted penalty function in the classical risk model. We develop the Gerber–Shiu function on the Laguerre basis, and then estimate the unknown coefficients based on sample information on claim numbers and individual claim sizes. The convergence rate of the estimate is derived. Some simulation examples are illustrated to show that the estimate performs very well when the sample size is finite. We also show that the proposed estimate outperforms other estimates in the simulation studies.     

Asymmetric multifractal features of the price–volume correlation in China’s gold futures market based on MF-ADCCA

In recent years, fractal theory has become a recognized research direction for explaining various complex phenomena that are difficult to constrain in the conventional efficient market hypothesis for financial markets. Moreover, because the gold futures prices are crucial to the futures market, research on the relationship between quantity and price is important for understanding market fluctuations. Therefore, this paper conducts an empirical analysis of the multifractal features and asymmetry in the price–volume correlation of China’s gold futures market based on the multifractal asymmetric detrended cross-correlation analysis method¹ . Results show that the cross-correlation between market price and volume is asymmetric and multifractal and that multifractal features are stronger when the price increases compared with when it declines. Moreover, the multifractal features vary over time. These findings indicate that the risk of China’s gold futures market will change with the price trend over time.     

Conglomerates on the rise again? A cross-regional study on the impact of the 2008–2009 financial crisis on the diversification discount

This paper investigates how the 2008–2009 financial crisis affected the value of diversification in different regions of the world, thereby emphasizing the role of the institutional context. We show that the effect of the credit crunch upon the diversification discount varied with the regions' level of capital market maturity and legal environment. In developed Asia Pacific, the British Isles, and North America, we find that the discount on conglomerates fell significantly during the crisis years; however, in Continental Europe – the region possessing the least developed capital markets and lowest legal investor protection in our sample – the impact of the financial meltdown upon the relative value of diversified firms was insignificant. Our study provides additional evidence on factors influencing the relative costs and benefits of diversified firms and highlights in particular the importance of accounting for different institutional settings.     

Do IPO index portfolios improve the investment opportunities for mean–variance investors?

We set out in this study to examine whether investors can improve their investment opportunity sets through the addition of an IPO index portfolio into various sets of benchmark portfolios. Using the IPOX indices from the years 1980–2006, we find that adding an IPO index portfolio does lead to a statistically significant enlargement of the investment opportunity set for investors. Our empirical findings are robust, demonstrating that there is scope for the further development of financial products relating to IPO stocks, since investors can gain diversification benefits through investing in such IPO-related products.     

Is the quality of female auditors really better? Evidence based on the Chinese A-share market

Unlike previous studies in which a single index was used to measure audit quality, this study establishes a new comprehensive index to measure audit quality via Discretionary Accrual, as estimated by Jones’ basic model (1991) and Audit Opinions. The former is used to measure the quality of financial statements, and the latter is used to measure the auditors’ independence in the mainstream international literature. We examine whether and how an auditor’s gender affects the quality of his or her audits under the framework of empathy theory and gender role socialization theory. Using a large sample of 9861 auditor-firm-year observations from Chinese A-share–listed companies from 2011 to 2015, we find that the audit quality of signed auditors shows significant gender differences: these significant gender differences differ from the findings of previous studies that female auditors could provide a higher-quality audit than male auditors; that is, in our study the audit quality of the male auditors exceeds that of the female auditors. After distinguishing the positive and negative directions of the Discretionary Accrual, we find no significant gender differences in audit quality between male and female auditors when the earnings had been adjusted upward by the client; that is, female and male auditors had the same audit risk perception. However, when the client adjusted earnings downward, which indicates a lower audit risk for the auditor, the audit quality of female auditors was significantly lower than that of the male auditors. After controlling for the age and position of the auditors, we also find that the gender differences in the auditors’ audit quality decreased significantly or even disappeared when the auditor’s age exceeded 45?years and/or their position was manager or above. These results are consistent with the empathy theory and gender role socialization theory.     

Empirical evidence on the impact of external monitoring on book–tax differences

This study investigates whether institutional ownership levels are associated with levels of and time-series variability in book–tax differences (BTDs). Firm and year fixed-effects regression results suggest that institutional ownership is negatively associated with total, permanent, and temporary BTDs. This effect is driven primarily by permanent BTDs in the pre-SOX era but is consistently present for both permanent and temporary BTDs post-SOX. Further, this negative association is present regardless of firms' classification as “tax planners” and/or “earnings managers.” Finally, the results provide some evidence that stronger monitoring by the board and audit committee (i.e., a smaller and more independent board and a larger audit committee) is associated with lower permanent BTDs but is not consistently related with total or temporary BTDs. Overall, these findings are consistent with higher levels of institutional ownership equating to more effective monitoring of management, resulting in lower BTDs (in terms of both levels and time-series variability).     

Conditional Value-at-Risk,spectral risk measures and (non-)diversification in portfolio selection problems – A comparison with mean–variance analysis

We study portfolio selection under Conditional Value-at-Risk and, as its natural extension, spectral risk measures, and compare it with traditional mean–variance analysis. Unlike the previous literature that considers an investor’s mean-spectral risk preferences for the choice of optimal portfolios only implicitly, we explicitly model these preferences in the form of a so-called spectral utility function. Within this more general framework, spectral risk measures tend towards corner solutions. If a risk free asset exists, diversification is never optimal. Similarly, without a risk free asset, only limited diversification is obtained. The reason is that spectral risk measures are based on a regulatory concept of diversification that differs fundamentally from the reward-risk tradeoff underlying the mean–variance framework.     

Can fintech improve the efficiency of commercial banks? —An analysis based on big data

This paper assess the potential impact of Fintech on the banking industry. Results suggest that, for commercial banks, development of Fintech leads to increased profitability, financial innovation, and improved control of risk. Overall, by using financial technology, commercial banks can improve their traditional business model by reducing bank operating costs, improving service efficiency, strengthening risk control capabilities, and creating enhanced customer-oriented business models for customers; thereby improving comprehensive competitiveness. We also find that levels of such outcomes vary with levels of respective bank’s use of technological innovation.     

Russia–Ukraine crisis: The effects on the European stock market

We examine the effect of the Russia–Ukraine crisis on the European stock markets. Because of increased political uncertainty, geographic proximity and the ramifications of the fresh sanctions imposed on Russia, the European stock markets tended to react negatively to this crisis. We find that on 21 February 2022, when Russia recognized two Ukrainian states as autonomous regions, European stocks incurred a significant negative abnormal return. Moreover, the negative stock price reactions continued in the post-event period. The magnitude of the stock price reactions to this crisis exhibits considerable variation across industries, countries and size of the company.