A Benchmark Approach to Portfolio Optimization under Partial Information

This paper proposes a filtering methodology for portfolio optimization when some factors of the underlying model are only partially observed. The level of information is given by the observed quantities that are here supposed to be the primary securities and empirical log-price covariations. For a given level of information we determine the growth optimal portfolio, identify locally optimal portfolios that are located on a corresponding Markowitz efficient frontier and present an approach for expected utility maximization. We also present an expected utility indifference pricing approach under partial information for the pricing of nonreplicable contracts. This results in a real world pricing formula under partial information that turns out to be independent of the subjective utility of the investor and for which an equivalent risk neutral probability measure need not exist.      

市场约束条件下的保险公司偿付能力监管

针对保险公司风险形态的变化,发达经济体经历了从静态偿付能力监管到动态偿付能力监管的变革过程.在制度逐步完备的情况下,这些国家仍然出现了很多偿付能力监管失灵的情形,大量保险公司因此破产.本文对动态偿付能力约束条件与偿付能力理论假设进行了研究,并结合实证分析,指出了现有偿付能力监管制度的缺陷,提出了完善制度设计、建立中国保险业动态偿付能力监管体系的建议.     

Quantitative Asset Pricing Implications of Endogenous Solvency Constraints

We study the asset pricing implications of an economy wheresolvency constraints are endogenously determined to deter agentsfrom defaulting while allowing as much risk sharing as possible.We solve analytically for efficient allocations and for thecorresponding asset prices, portfolio holdings, and solvencyconstraints for a simple example. Then we calibrate a more generalmodel to U.S. aggregate as well as idiosyncratic income processes.We find equity premia, risk premia for long-term bonds, andSharpe ratios of magnitudes similar to the U.S. data for lowriskaversion and a lowtime-discount factor.     

Portfolio Optimization under Lower Partial Risk Measures

Portfolio management using lower partial risk (downside risk) measures is attracting more attention of practitioners in recent years. The purpose of this paper is to review important characteristics of these riskmeasures and conduct simulation using four alternative measures, lower semi-variance, lower semi-absolute deviation, first order below targetrisk and conditional value-at-risk.We will show that these risk measures are useful to control downside risk whenthe distribution of assets is non-symmetric. Further, we will propose a computational scheme to resolve the difficultyassociated with solving a large dense linear programming problems resulting from these models. We will demonstrate that this method can in fact solve problems consisting of10⁴ assets and 10⁵ scenarios within a practical amount of CPU time.     

Applications of the Integrated Approach to International Portfolio Optimization

In a recent paper, we used a stock-bond integrated model to construct aninternationally diversified portfolio using historical data of stocksand bonds of Japan and the U.S. The result of computational experiments using this integrated approach showed that it can serve as a morereliable and lessexpensive method than the traditional asset allocation strategy. In this paper, we present the results of subsequent experiments using the dataof more than 700 stocks and bonds of six countries: U.S., U.K., Germany, France, Hong Kong, and Japan. In these experiments, we compared the direct historical data method and the betapricing method in order to estimate the expected rate of return of assets. Anotherimportant feature is the use of a new strategy for hedging the exchange raterisk by using historical data to calculate the hedge rate on currencies. Computational experiments show a remarkable improvement over the resultspresented in [9]. Also, the result of the simulation shows that the beta pricing model leads to a better and more stable performance than the direct historical data method.     

The Valuation of Contingent Claims under Portfolio Constraints: Reservation Buying and Selling Prices

With constrained portfolios contingent claims do not generally havea unique price that rules out arbitrage opportunities.Earlier studies have demonstratedthat when there are constraints on the hedge portfolio,a no-arbitrage price interval for any contingent claim exists.I consider the more realistic case where the constraints are imposed on the total portfolio of each investor and define reservation buying and selling prices for contingent claims. I derive propertiesof these prices, show how they can be computed numerically, and study two simple examples in which the reservation prices and the corresponding hedging strategies are compared to the Black–Scholes setting.     

Portfolio Optimization in Discontinuous Markets under Incomplete Information

We consider the problem of maximization of expected utility from terminal wealth for log and power utility functions in a market model that leads to purely discontinuous processes. We study this problem as a stochastic control problem both under complete as well as incomplete information. Our contribution consists in showing that the optimal strategy can be obtained by solving a system of equations that in some cases is linear and that a certainty equivalence property holds not only for log-utility but also for a power utility function. For the case of a power utility under incomplete information we also present an independent direct approach based on a Zakai-type equation.      

Principles of Financial Regulation: A Dynamic Portfolio Approach

Economists seeking explanations for the global financial crisisof 1997–99 are reaching consensus that a major factorwas weak financial institutions, which resulted in part frominadequate government regulations. At the same time many developingcountries are struggling with an overregulated financial system—onethat stifles innovation and the flow of credit to new entrepreneursand that can stunt the growth of well-established firms. Inparticular, too many countries are relying excessively on capitaladequacy standards, which are inefficient and sometimes counterproductive.The author argues that financial systems can be reformed successfullyusing a "dynamic portfolio approach" aimed at managing the incentivesand constraints that affect not only financial institutions'exposure to risk but also their ability to cope with it. Thearticle sets out general principles of financial regulationand shows how the dynamic portfolio approach can help countriesdeal with the special problems that arise during the transitionto a more liberalized economy as well as those that arise indealing with a financial crisis similar to the 1997 crisis inEast Asia.      

考虑现实约束的不确定投资组合研究

作为实现财富增值保值的有效手段,投资组合引起了实务界和学术界的广泛关注。然而,以往研究大多忽略了金融市场的复杂性、外部因素的不确定性和历史数据的缺失性。为更准确刻画金融市场的现实状况、求解最优投资组合,本文引入不确定变量来描述证券收益率,进而构建包含交易成本、整手交易、流动性风险、交易上下限和行业分散化等现实约束的证券不确定投资组合模型;同时采用遗传算法进行计算,并代入模拟交易数据对比有现实约束和无现实约束投资组合模型的最优解。研究结果表明,引入现实约束条件后,最优投资组合发生了变化,期望收益率显著下降。上述研究结论带来的启示:对于证券投资者而言,在进行投资交易时,应充分考虑交易成本和不确定性风险,确保将投资风险限制在可控的范围之内;对于证券监管机构而言,应加强对证券市场的监督与管理,尤其是系统重要性机构,防范和化解流动性风险和不确定性风险。     

Portfolio Capital Flows in Thailand: A Bayesian Model Averaging Approach

We study the gross and net terms of portfolio capital flows by examining their determinants. Through the application of the Bayesian model averaging method, the determinants are evaluated by a set of models instead of a single specification. Our findings show that the magnitude of both gross equity and gross debt flows are large, relative to their net terms. Equity inflows and outflows are quite symmetric with similar determinants; debt inflows and outflows are less symmetric. The paper provides partial evidence to support the importance of both internal and external factors as determinants of capital flows.     

Estimating Portfolio and Consumption Choice: A Conditional Euler Equations Approach

This paper develops a nonparametric approach to examine how portfolio and consumption choice depends on variables that forecast time-varying investment opportunities. I estimate single-period and multiperiod portfolio and consumption rules of an investor with constant relative risk aversion and a one-month to 20-year horizon. The investor allocates wealth to the NYSE index and a 30-day Treasury bill. I find that the portfolio choice varies significantly with the dividend yield, default premium, term premium, and lagged excess return. Furthermore, the optimal decisions depend on the investor's horizon and rebalancing frequency.     

A Factor Allocation Approach to Optimal Bond Portfolio

This paper proposes a new method to a bond portfolio problem in a multi-period setting. In particular, we apply a factor allocation approach to constructing the optimal bond portfolio in a class of multi-factor Gaussian yield curve models. In other words, we consider a bond portfolio problem in terms of a factors’ allocation problem. Thus, we can obtain clear interpretation about the relation between the change in the shape of a yield curve and dynamic optimal strategy, which is usually hard to be obtained due to high correlations among individual bonds. We first present a closed form solution of the optimal bond portfolio in a class of the multi-factor Gaussian term structure model. Then, we investigate the effects of various changes in the term structure on the optimal portfolio strategy through series of comparative statics.     

Portfolio Performance Measurement: a No Arbitrage Bounds Approach

This paper presents a new method to examine the performance evaluation of mutual funds in incomplete markets. Based on the no arbitrage condition, we develop bounds on admissible performance measures. We suggest new ways of ranking mutual funds and provide a diagnostic instrument for evaluating the admissibility of candidate performance measures. Using a monthly sample of 320 equity funds, we show that admissible performance values can vary widely, supporting the casual observation that investors disagree on the evaluation of mutual funds. In particular, we cannot rule out that more than 80% of the mutual funds are given positive values by some investors. Moreover, we empirically demonstrate that potential inference errors embedded in existing parametric performance measures can be of important magnitude.     

投资组合行业配置的动态VaR研究——基于时变Copula-GJR-Skewed-t模型

用时变Copula-GJR-Skewed-t模型研究了深证22个行业分类指数中任意两个投资组合的动态VaR,并与静态VaR比较。实证结果表明,时变t-Copula函数在众多Copula函数中对行业投资组合的拟合效果最优,给出了模型估计出的VaR最大和最小的5对行业组合,不同行业组合的动态VaR在股市周期各阶段关系相对稳定,同一行业组合的动态VaR和静态VaR关系相对稳定,且略高于静态VaR。     

Optimal Risk Transfer: A Numerical Optimization Approach

Capital efficiency and asset/liability management are part of the Enterprise Risk Management Process of any insurance/reinsurance conglomerate and serve as quantitative methods to fulfill the strategic planning within an insurance organization. A considerable amount of work has been done in this ample research field, but invariably one of the last questions is whether or not, numerically, the method is practically implementable, which is our main interest. The numerical issues are dependent on the traits of the optimization problem, and therefore we plan to focus on the optimal reinsurance design, which has been a very dynamic topic in the last decade. The existing literature is focused on finding closed-form solutions that are usually possible when economic, solvency, and other constraints are not included in the model. Including these constraints, the optimal contract can be found only numerically. The efficiency of these methods is extremely good for some well-behaved convex problems, such as Second-Order Conic Problems. Specific numerical solutions are provided to better explain the advantages of appropriate numerical optimization methods chosen to solve various risk transfer problems. The stability issues are also investigated together with a case study performed for an insurance group that aims capital efficiency across the entire organization.     

The Relative Relevance of Cash Flow and Accrual Information for Solvency Assessments: A Multi‐Method Approach

This multi-method study reports the results of two complementary experiments investigating the relevance of cash flow and accrual information. A behavioural field experiment investigated differences in the accuracy of solvency assessments between commercial lending managers using cash flow information and those using accrual information. Results indicated that commercial lending managers using cash flow information made more accurate solvency assessments than managers using accrual information. Results of an archival quantitative modeling experiment complemented these results and indicated cash flow information had incremental information content beyond accrual information. Our results confirmed the decision-usefulness of cash flow information and supported the mandate of the Statement of Cash Flows.     

Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints

We examine the optimal dynamic portfolio decisions for investorswho acquire housing services from either renting or owning ahouse. Our results show that when indifferent between owningand renting, investors owning a house hold a lower equity proportionin their net worth (bonds, stocks, and home equity), reflectingthe substitution effect, yet hold a higher equity proportionin their liquid portfolios (bonds and stocks), reflecting thediversification effect. Furthermore, following the suboptimalpolicy of always renting leads investors to overweigh in stocks,while following the suboptimal policy of always owning a housecauses investors to underweigh in stocks.