CEO risk incentives and firm performance following R&D increases

In this study we analyze how CEO risk incentives affect the efficiency of research and development (R&D) investments. We examine a sample of 843 cases in which firms increase their R&D investments by an economically significant amount over the period of 1995–2006. We find that firms with higher sensitivity of CEO compensation portfolio value to stock volatility (vega) are more likely to have large increases in R&D investments. More importantly, we find that high-vega firms experience lower abnormal stock returns and lower operating performance compared to their low-vega counterparts following the R&D increases. Our main results hold in a variety of robustness tests. The results are consistent with the conjecture that high-vega compensation portfolios may induce managers to overinvest in inefficient R&D projects and therefore hurt firm performance.     

The Impact of Large Portfolio Insurers on Asset Prices

We develop a simple model in which the presence of portfolio insurers in a market of risk-averse traders leads to multiple equilibria for the pricing of financial assets and can cause an increase in volatility, including insurance-induced price drops. We demonstrate, however, that centralized portfolio insurance firms may actually reduce, not increase, volatility, even if the existence of these firms increases the total amount of funds under insurance.     

Portfolio returns and manager activity: How to decompose tracking error into security selection and market timing

We develop a new method for detecting portfolio manager activity. Our method relies exclusively on portfolio returns and, consequently, avoids the pitfalls associated with disclosed portfolio holdings. We investigate the link between activity and performance of actively managed U.S. equity funds from 2000 to 2007 and document robust evidence that future performance is positively related to past stock picking and negatively associated with past market timing. Finally, we find that portfolio manager activity is highly persistent over time, which supports the conclusion that stock picking increases performance while market timing decreases performance.     

Asset Pricing and Expected Inflation

This paper provides an equilibrium model in which expected real returns on common stocks are negatively related to expected inflation and money growth. It is shown that the fall in real wealth associated with an increase in expected inflation decreases the real rate of interest and the expected real rate of return of the market portfolio. The expected real rate of return of the market portfolio falls less, for a given increase in expected inflation, when the increase in expected inflation is caused by an increase in money growth rather than by a worsening of the investment opportunity set. The model has empirical implications for the effect of a change in expected inflation on the cross-sectional distribution of asset returns and can help to understand why assets whose return covaries positively with expected inflation may have lower expected returns. The model also agrees with explanations advanced by Fama [5] and Geske and Roll [10] for the negative relation between stock returns and inflation.     

Executive stock options,differential risk-taking incentives,and firm value

The sensitivity of stock options' payoff to return volatility, or vega, provides risk-averse CEOs with an incentive to increase their firms' risk more by increasing systematic rather than idiosyncratic risk. This effect manifests because any increase in the firm's systematic risk can be hedged by a CEO who can trade the market portfolio. Consistent with this prediction, we find that vega gives CEOs incentives to increase their firms' total risk by increasing systematic risk but not idiosyncratic risk. Collectively, our results suggest that stock options might not always encourage managers to pursue projects that are primarily characterized by idiosyncratic risk when projects with systematic risk are available as an alternative.     

Value-at-risk capital requirement regulation,risk taking and asset allocation: a mean–variance analysis

In this study, the mean–variance framework is employed to analyze the impact of the Basel value-at-risk (VaR) market risk regulation on the institution's optimal investment policy, the stockholders’ welfare, as well as the tendency of the institution to change the risk profile of the held portfolio. It is shown that with the VaR regulation, the institution faces a new regulated capital market line, which induces resource allocation distortion in the economy. Surprisingly, only when a riskless asset is available does VaR regulation induce the institution to reduce risk. Otherwise, the regulation may induce higher risk, accompanied by asset allocation distortion. On the positive side, the regulation implies an upper bound on the risk the institution takes and it never induces the firm to select an inefficient portfolio. Moreover, when the riskless asset is available, tightening the regulation always increases the amount of maintained eligible capital and decreases risk.     

The price adjustment and lead-lag relations between stock returns: microstructure evidence from the Taiwan stock market

This paper investigates the price adjustment and lead-lag relations between returns on five size-based portfolios in the Taiwan stock market. It finds evidence that the price adjustment of small-stock portfolios is not slower than that of large-stock portfolios. Additionally, limited evidence supports a positive leading role of large-stock portfolio returns over small-stock portfolio returns. These two findings are substantially different from the results of previous research on developed markets.     

A CROSS-SECTIONAL REGRESSION TEST OF THE MEAN-VARIANCE EFFICIENCY OF AN AUSTRALIAN VALUE WEIGHTED MARKET PORTFOLIO

This paper tests the Mean-Variance efficiency of a value weighted Australian market portfolio using a multivariate cross-sectional regression approach developed by Shanken (1985). This test methodology is sufficiently powerful to reject the null hypothesis that the market portfolio is ex ante Mean-Variance efficient when test assets are constructed on the basis of size (market capitalisation). However, when test assets are constructed on the basis of industry classification the model is unable to reject the Mean-Variance efficiency of the market portfolio. This test statistic provides some useful diagnostics which are examined in the paper.     

Underestimation of portfolio insurance and the crash of October 1987

We examine market crashes in the multiperiod framework of Glostenand Milgrom (1985). Our analysis shows that if the market'sprior beliefs underestimate the extent of dynamic hedging strategiessuch as portfolio insurance, then the price will be greaterthan that which would be implied by fundamentals if the extentof portfolio insurance were known with certainty. Over time,the market learns of the amount of portfolio insurance, andconsequently reevaluates the previous inferences drawn frompurchases that were erroneously regarded as based on favorableinformation. The result is that the price falls when the amountof portfolio insurance is revealed.     

Income hedging and portfolio decisions

We examine whether the decision to participate in the stock market and other related portfolio decisions are influenced by income hedging motives. Economic theory predicts that the market participation propensity should increase as the correlation between income growth and stock market returns decreases. Surprisingly, empirical studies find limited support for the income hedging motive. Using a rich, unique Dutch data set and the National Longitudinal Survey of the Youth (NLSY) from the United States, we show that when the income-return correlation is low, individuals exhibit a greater propensity to participate in the market and allocate a larger proportion of their wealth to risky assets. Even when the income risk is high, individuals exhibit a higher propensity to participate in the market when the hedging potential is high. These findings suggest that income hedging is an important determinant of stock market participation and asset allocation decisions.     

The effect of mergers on implied volatility of equity options

This paper uses a sample of 25 large mergers from 1996 to 2004 to study the effect of mergers on the implied volatilities of equity options. The results indicate a statistically significant increase in volatility beyond the amount predicted if the transaction were effectively nothing more than a portfolio combination of the target and acquirer. The disparity suggests that, at least for the first 18 months after the transaction becomes effective, market participants expect mergers to increase risk. Integration risk and uncertainty about the extent to which efficiency gains and greater market power are realized are possible explanations for the discrepancy.     

Currency Hedging Using the Mean-Gini Framework

The mean-Gini framework has been suggested as a robust alternative to the portfolio approach to futures hedging given its optimality under general distributional conditions. However, calculation of the Gini hedge ratio requires estimation of the underlying price distribution. We estimate minimum-Gini hedge ratios using two widely-used estimation procedures, the empirical distribution function method and the kernel method, for three emerging market and three developed market currencies. We find that these methods yield different Gini hedge ratios. These differences increase with risk aversion and are statistically significant for all developed market currencies but only one emerging market currency. In-sample analyses show that the empirical distribution function method is more effective at risk reduction than the kernel method for developed market currencies, whereas the kernel method is superior for emerging market currencies. Post-sample analyses strengthen the superiority of the empirical distribution function method for developed market and, in several cases, for emerging market currencies.JEL Classification: F31, G15     

On the Cross-sectional Relation between Expected Returns and Betas

There is an exact linear relation between expected returns and true “betas” when the market portfolio is on the ex ante mean-variance efficient frontier, but empirical research has found little relation between sample mean returns and estimated betas. A possible explanation is that market portfolio proxies are mean-variance inefficient. We categorize proxies that produce particular relations between expected returns and true betas. For the special case of a zero relation, a market portfolio proxy must lie inside the efficient frontier, but it may be close to the frontier.     

Prospect theory–based portfolio optimization: an empirical study and analysis using intelligent algorithms

The behaviourally based portfolio selection problem with investor’s loss aversion and risk aversion biases in portfolio choice under uncertainty is studied. The main results of this work are: developed heuristic approaches for the prospect theory model proposed by Kahneman and Tversky in 1979 as well as an empirical comparative analysis of this model and the index tracking model. The crucial assumption is that behavioural features of the prospect theory model provide better downside protection than traditional approaches to the portfolio selection problem. In this research the large-scale computational results for the prospect theory model have been obtained for real financial market data with up to 225 assets. Previously, as far as we are aware, only small laboratory tests (2–3 artificial assets) have been presented in the literature. In order to investigate empirically the performance of the behaviourally based model, a differential evolution algorithm and a genetic algorithm which are capable of dealing with a large universe of assets have been developed. Specific breeding and mutation, as well as normalization, have been implemented in the algorithms. A tabulated comparative analysis of the algorithms’ parameter choice is presented. The prospect theory model with the reference point being the index is compared to the index tracking model. A cardinality constraint has been implemented to the basic index tracking and the prospect theory models. The portfolio diversification benefit has been found. The aggressive behaviour in terms of returns of the prospect theory model with the reference point being the index leads to better performance of this model in a bullish market. However, it performed worse in a bearish market than the index tracking model. A tabulated comparative analysis of the performance of the two studied models is provided in this paper for in-sample and out-of-sample tests. The performance of the studied models has been tested out-of-sample in different conditions using simulation of the distribution of a growing market and simulation of the t-distribution with fat tails which characterises the dynamics of a decreasing or crisis market.     

Choosing to Cofinance: Analysis of Project-Specific Alliances in the Movie Industry

We use a movie industry project-by-project dataset to analyzethe choice of financing a project internally versus financingit through outside alliances. The results indicate that projectrisk is positively correlated with alliance formation. Moviestudios produce a variety of films and tend to develop theirsafest projects internally. Our findings are consistent withinternal capital market explanations. We find mixed evidenceregarding resource pooling, i.e., sharing the cost of largeprojects. Finally, the evidence shows that projects developedinternally perform similarly to projects developed through outsidealliances.     

Do ADRs enhance portfolio performance for a domestic portfolio? Evidence from the 1990s

American depository receipts (ADRs) represent an increasingly popular and convenient mechanism for international investing. We analyze ADRs traded throughout the 1990s and find that these securities offer a diversification and portfolio performance benefit when combined with a domestic portfolio (proxied by the S&P 500). While we find that emerging market ADRs are effective instruments for reducing portfolio risk, they do not improve portfolio performance as measured by the Sharpe ratio. Developed market ADRs do improve portfolio performance as measured by the Sharpe ratio. The asset allocation which maximizes the Sharpe ratio is 84 percent domestic stocks, 16 percent developed ADRs, and 0 percent emerging ADRs. Further, due to problems in defining an appropriate market index for ADRs, the Sharpe ratio is viewed to be the preferred performance measure. Other measures such as Jensen’s alpha and the Treynor measure are susceptible to being “gamed” to distort portfolio performance.     

Metodología para la toma de decisiones de inversión en portafolio de acciones utilizando la técnica multicriterio AHP

This paper presents a methodology for decision making in the Colombia stock market by using the Analytic Hierarchy Process (AHP) multicriteria technique. The problem of the research is related to the process for making investment decisions in a stock market by considering risk and profitability criteria. The research methodology includes the integration of traditional techniques for making investment decisions in equity portfolio with the AHP technique. The AHP multicriteria technique allows evaluating a finite number of choices with qualitative and quantitative criteria in a hierarchical way. The methodology has been tested on the solution of the problem of choice an equity portfolio by considering stocks of high and Medium Marketability which quoted in the Colombian stock market from December 2007 to April 2010. The computational results show the importance and efficiency of the successful integration of the traditional criteria of equity portfolio investment with the methodology AHP, for finding an appropriate balance between profitability and risk in the process of stock investment on the Colombian stock market.     

Country-specific equity market characteristics and foreign equity portfolio allocation

Do country-specific equity market characteristics explain variations in foreign equity portfolio allocation? We study this question using comprehensive foreign equity portfolio holdings data and different measures of country-specific equity market factors for 36 host countries. Employing panel data econometric estimations, our investigation shows that foreign investors prefer to invest more in larger and highly visible developed markets which are more liquid, exhibit a higher degree of market efficiency and have lower trading costs. The findings imply that by improving the preconditions necessary for well-functioning capital markets, policymakers should be able to attract higher levels of foreign equity portfolio investments.     

Disagreement and return predictability of stock portfolios

This paper provides evidence that portfolio disagreement measured bottom-up from individual-stock analyst forecast dispersions has a number of asset pricing implications. For the market portfolio, market disagreement mean-reverts and is negatively related to ex post expected market return. Contemporaneously, an increase in market disagreement manifests as a drop in discount rate. For book-to-market sorted portfolios, the value premium is stronger among high disagreement stocks. The underperformance by high disagreement stocks is stronger among growth stocks. Growth stocks are more sensitive to variations in disagreement relative to value stocks. These findings are consistent with asset pricing theory incorporating belief dispersion.     

我国证券投资基金的积极资产组合管理能力研究

本文以19支开放式基金和23支封闭式基金为研究样本,通过改进PCM模型,设计适用于非有效市场或弱有效市场的指标S,来考察我国证券投资基金在2005年1月1日至2007年6月30日这段研究区间内的积极资产组合管理能力,并对开放式基金和封闭式基金的积极资产组合管理能力进行比较分析.研究发现,开放式基金和封闭式基金均有较强的积极资产组合管理能力;封闭式基金的积极资产组合管理能力整体要高于开放式基金,特别是在上涨和震荡行情中;同时,市场走势的波动也会对基金的积极资产组合管理能力产生一定的影响.