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.     

Optimal portfolio positioning under ambiguity

This paper analyzes the optimality of financial portfolios when the investor has a utility with ambiguity aversion. It provides a general result about the optimal portfolio profile under ambiguity, in the Anscombe–Aumann framework, using the Maccheroni et al. (2006) approach which includes Gilboa and Schmeidler's (1989) multiple prior preferences and Hansen and Sargent's (2011) multiplier preferences. The paper then details the CRRA case with an ambiguity index based on relative entropy. Such findings have practical applications in structured portfolio management. Indeed, it is important to take account of uncertainty about the true values of financial parameters when determining the best portfolio profile.     

Exchange rate dynamics under gradual portfolio adjustment

This paper generalizes the asset market approach to exchange rate determination by introducing gradual adjustment of asset-holder portfolios. The influence of different speeds of portfolio adjustment on exchange rate dynamics is considered. Asset market models characterized by instantaneous portfolio equilibrium appear as a special case. The dynamics of exchange rate adjustment following an open-market operation are shown to be qualitatively similar to those of the orthodox instantaneous portfolio equilibrium models. Thus, gradual portfolio adjustment does not compromise the qualitative results derived with the help of those models. The speed of portfolio adjustment is however shown to influence the degree of exchange rate volatility. In particular, the phenomenon of exchange rate overshooting depends crucially on the speed of portfolio adjustment.     

A multi-period portfolio selection optimization model by using interval analysis

Due to few historical data that can be obtained in an emerging securities market, the future returns, risk and liquidity of securities cannot be forecasted precisely. The investment environment is usually fuzzy and uncertain. To handle these imprecise data, this paper discusses a fuzzy multi-period portfolio optimization problem where the returns, risk, and liquidity of securities are represented by interval variables. By taking the return, risk, liquidity and diversification degree of portfolio into consideration, an interval multi-period portfolio selection optimization model is proposed with the objective of maximizing the terminal wealth under the constraints of the return, risk and diversification degree of portfolio at each period. In the proposed model, a proportion entropy is employed to measure the diversification degree of portfolio. Using the fuzzy decision-making theory and multi-objective programming approach, the proposed model is transformed into a crisp nonlinear programming. Then, we design an improved particle swarm optimization algorithm for solution. Finally, a numerical example is given to illustrate the application of our model and demonstrate the effectiveness of the designed algorithm.     

International asset prices and portfolio choices under Bayesian learning

We calculate equilibrium asset prices and portfolio choices from a two-country OLG international asset pricing model under the assumption that investors are on a Bayesian learning path. Investors from both countries receive identical information flows, but domestic investors start off with less precise priors concerning foreign fundamentals. Learning is shown to produce first-order effects on the properties of asset prices, in the form of increased equity returns, volatility clustering, and time-varying correlations across national stock markets. Moreover, on a learning path, estimation risk generates portfolio biases similar to those observed empirically, i.e. a strong preference towards domestic securities and excessive turnover in foreign securities. These findings are robust to changes in prior beliefs, the calibration of initial information asymmetries, and the parameterization of the model. We use real GDP data for the US and Europe to calibrate the model and show that in the event of a financial liberalization during the 1970s, high excess returns, time-varying volatility, substantial home bias, and excess turnover should have been observed.     

Incentive contracts in delegated portfolio management under VaR constraint

This paper studies the incentive effect of linear performance-adjusted contracts in delegated portfolio management under a value-at-risk (VaR) constraint. It is shown that a linear performance-based contract can provide incentives for the portfolio manager to work at acquiring private information under a VaR risk constraint. The expected utility and optimal effort of a risk-averse manager are increasing functions of the return sharing ratio in the contract. However, a risk constraint causes the portfolio manager to reduce effort in gathering private information, suggesting that the VaR constraint increases the moral hazard between the investor and the manager.     

Optimal climate policy under the possibility of a catastrophe

This paper concerns optimal emissions of greenhouse gases when catastrophic consequences are possible. A numerical model is presented, which takes into account both continuous climate-feedback damages as well as the possibility of a catastrophic outcome. The possibility of a climate catastrophe is a major argument for greenhouse gas abatement even in absence of continuous damage. Special attention is given to the subjective probability of a catastrophe and the pure rate of time preferences, and implicit values of these parameters are calculated if an emissions stabilisation target is assumed optimal. Finally, the expected value of perfect information about the probability of a catastrophe is estimated.     

On mean-variance portfolio selection under a hidden Markovian regime-switching model

We study a mean-variance portfolio selection problem under a hidden Markovian regime-switching Black–Scholes–Merton economy. Under this model, the appreciation rate of a risky share is modulated by a continuous-time, finite-state hidden Markov chain whose states represent different states of an economy. We consider the general situation where an economic agent cannot observe the “true” state of the underlying economy and wishes to minimize the variance of the terminal wealth for a fixed level of expected terminal wealth with access only to information about the price processes. By exploiting the separation principle, we discuss the mean-variance portfolio selection problem and the filtering-estimation problem separately. We determine an explicit solution to the mean-variance problem using the stochastic maximum principle so that we do not need the assumption of Markovian controls. We also provide robust estimates of the hidden state of the chain and develop a robust filter-based EM algorithm for online recursive estimates of the unknown parameters in the model. This simplifies the filtering-estimation problem.     

The possibility of mixed-strategy equilibria with constant-returns-to-scale technology under Bertrand competition

Abstract. We analyze the Nash equilibria of a standard Bertrand model. We show that in addition to the marginal-cost pricing equilibrium there is a possibility for mixed-strategy equilibria yielding positive profit levels. We characterize these equilibria and find that having unbounded revenues is the necessary and sufficient condition for their existence. Hence, we demonstrate that under realistic assumptions the only equilibrium is marginal-cost pricing.     

The possible shapes of the production possibility curve under Cobb-Douglas production function

It is well-known that if returns to scale differ in different output ranges of the same commodity, the production possibility curve may change its shape from concave to convex to the origin. But what is less obvious may be that if they do not differ in different output ranges, the PPC may not be either concave, or convex but may well be both concave and convex. Under Cobb Douglas production functions the PPC changes its curvature at most twice. We draw some examples where the PPC changes its curvature once and twice.     

Delegated portfolio management and optimal allocation of portfolio managers

In this article, we investigate whether the application of the mean-variance framework on portfolio manager allocation offers any out-of-sample benefits compared to a naïve strategy of equal weighting. Based on an exclusive data-set of high-net-worth (HNW) investors, we utilize a wide variety of methodologies to estimate the input parameters including exponentially weighted moving average (EWMA), generalized autoregressive conditional heteroscedasticity (GARCH) and Bayes–Stein shrinkage estimation. We apply nine different mean-variance models, but find that none of these present any consistent benefit over a naïve strategy of equal weighting.     

Hedging the portfolio of raw materials and the commodity under the mark-to-market risk

This paper considers the hedging problem of a portfolio composed of raw materials and a commodity. A new theoretical model is presented to manage the risk exposure of the portfolio under the mark-to-market risk. Moreover, we employ the Lemke algorithm to obtain the optimal hedging strategy. We use a case of the soybean oil manufacturer from May 2008 to June 2011 to illustrate the proposed model and algorithm. The results show that the mark-to-market risk must be taken into account when devising the hedging strategies.     

试论WTO体制下的保障措施

在WTO多边贸易体制中,保障措施被视为具有“安全阀”的作用。由于实施方可以对进口产品实施单边限制措施从而干涉其他成员的合法贸易,保障措施日益受到WTO各成员方的青睐。因此,中国应着重于对特保机制的研究,分析现状,寻求如何有效应对来自其他成员的保障措施。     

试论WTO体制下的保障措施

在WTO多边贸易体制中,保障措施被视为具有"安全阀"的作用.由于实施方可以对进口产品实施单边限制措施从而干涉其他成员的合法贸易,保障措施日益受到WTO各成员方的青睐.因此,中国应着重于对特保机制的研究,分析现状,寻求如何有效应对来自其他成员的保障措施.     

A portfolio model estimator

An extension of the Hatanaka method is discussed and applied to the estimation of portfolio models. In particular, it is shown that the invariance property is maintained if the instruments are constructed in a way which is consistent with the balance-sheet constraint, and that the direct estimation of equilibrium coefficients is facilitated by the generalisation of an expansion technique.     

Foreign portfolio diversification and risk-sharing

We investigate income smoothing associated with international portfolio diversification by decomposing the net factor income (NFI) channel into interests, dividends and retained earnings, for OECD and EU countries. We find that interest receipts and equity dividend payments contribute significantly to absorb domestic income shocks. Geographically concentrated portfolios and, in particular, biases toward EU markets have a strong negative effect on the degree of risk-sharing.     

An inflation-hedging portfolio selection model

This paper suggests an investment strategy which allows an investor to specify the desired return on investment to be equal to the expected rate of inflation plus a certain premium rate, and then helps the investor select those stocks which will provide the greatest chance of meeting that specified investment goal.     

Implementing efficient conservation portfolio design

Modern tools for cost-effective conservation reserve site planning require the planner to have information about spatial distributions of conservation costs and benefits. Climate change creates unprecedented uncertainty about future land values and species habitat ranges, such that conservation scientists cannot map costs and benefits with certainty anymore. This paper contributes to the literature on the economics of conservation in the face of climate change uncertainty. It advances a new method for using modern portfolio theory to choose lands to protect that yield total conservation returns with less uncertainty. It explores the implications for portfolio recommendations of variation in the correlations between ecological and land-value responses to climate change. It also tests the robustness of the method to shortcuts that might be taken to simplify analysis, identifying problems that arise if conservation costs are ignored in portfolio analysis and demonstrating when portfolio recommendations are sensitive to how ecological benefits are quantified.