Real estate investment: Market volatility and optimal holding period under risk aversion

This paper deals with real estate portfolio optimization when investors are risk averse. In this framework, we examine an important decision making problem, namely the determination of the optimal time to sell a diversified real estate portfolio. The optimization problem corresponds to the maximization of a concave utility function defined on both the free cash flows and the terminal value of the portfolio. We determine several types of optimal times to sell and analyze their properties. We extend previous results, established for the quasi linear utility case, where investors are risk neutral. We consider four cases. In the first one, the investor knows the probability distribution of the real estate index. In the second one, the investor is perfectly informed about the real estate market dynamics. In the third case, the investor uses an intertemporal optimization approach which looks like an American option problem. Finally, the buy-and-hold strategy is considered. For these four cases, we analyze in particular how the solutions depend on the market volatility and we compare them with those of the quasi linear case. We show that the introduction of risk aversion allows to better account for the real estate market volatility. We also introduce the notion of compensating variation to better measure the impacts of both the risk aversion and the volatility.     

Focusing on volatility information instead of portfolio weights as an aid to investor decisions

When faced with the challenge of forming a portfolio containing a risky and a risk-free asset, investors tend to apply the same portfolio weights independently of the volatility of the risky asset. This “percentage heuristic” can lead to different levels of portfolio risk when the same investor is presented with a more or a less risky asset. Using four experiments, we show that asking investors to choose the return distribution for their portfolio while keeping the exact portfolio weights unknown leads to greater similarity in levels of portfolio volatility (across different levels of risk of the risky asset) than asking investors to choose this distribution while additionally facing the portfolio weights. Higher consistency in risk taking is obtained both between and within test subjects.     

Portfolio choice, attention allocation, and price comovement

This paper models the attention allocation of portfolio investors. Investors choose the composition of their information subject to an information flow constraint. Given their expected investment strategy in the next period, which is to hold a diversified portfolio, in equilibrium investors choose to observe one linear combination of asset payoffs as a private signal. When investors use this private signal to update information about two assets, changes in one asset affect both asset prices and may lead to asset price comovement. The model also has implications for the transmission of volatility shocks between two assets.     

The importance of fear: investor sentiment and stock market returns

The presence of investor sentiment pushes asset prices away from the equilibrium level justified by underlying fundamentals. While sentiment is not directly observable, identifying appropriate proxies and, quantifying the impact of sentiment on asset prices is an important topic. Asset prices that do not appropriately reflect fundamental values may result in inefficient allocation of capital – impacting portfolio allocation decisions and the cost of capital. Utilizing a number of sentiment proxies, over the period 1990–2015, we demonstrate a strong relationship between investor sentiment and stock returns that is consistent with theoretical explanations of sentiment. We determine that implied volatility index (VIX) is the preferred measure of sentiment in terms of improving model fit and adding explanatory power. Causality tests suggest that investor fear (VIX) drives returns across firm-size and value, and also across industry. We also illustrate that firms that are more subjective to value, or face limits to arbitrage, such as small-cap stocks, or those in the business equipment (technology) or telecoms industry, are most responsive to changes investor sentiment. Finally, we demonstrate that sentiment has a greater influence on market returns during recession, when sentiment is at its lowest ebb, and this is particularly true for those stocks most susceptible to speculative demand.     

Panel data analysis of multi-factor capital asset pricing models

In this article, we propose MFCAPM panel models with fixed effects and test theories associated with risk exposures and anomalies postulated by Fama and French, and we assess their out-of-sample predictive performances. Based on the portfolios formed by French, we construct 10 panel models, each consisting of 10 portfolios grouped by size deciles, and another 10 panels by value deciles. In the presence of cross-section dependence, the MFCAPM panel model is estimated by the feasible generalized least squares (FGLS) method for the sample period 1963(1)-2018(9). The results show that the market, firm-size and value risk exposures are significant and robust across three-, five- and six-factor panel models. Significant time-fixed effects indicate that there are several portfolios resilient to dot.com bubble peak in 2000, while some others resilient to GFC in 2007. We estimate the models for the in-sample period 1963(1)–1999(12) and generate the out-of-sample portfolio returns for the period 2000(1)–2018(9). We find that portfolio returns forecasts generated by the six-factor panel model are superior to other MFCAPM panel models, mostly due to the momentum factor (investor behaviour) explaining large return variations and volatility exposures. The findings have implications for investors, security traders and portfolio risk managers.     

OPTIMAL INTERNATIONAL ASSET ALLOCATION WITH TIME-VARYING RISK

This paper examines the optimal allocation each period of an internationally diversified portfolio from the different points of view of a UK and a US investor. We find that investor location affects optimal asset allocation. The presence of exchange rate risk causes the markets to appear not fully integrated and creates a preference for home assets. Domestic equity is the dominant asset in the optimal portfolio for both investors, but the US investor bears less risk than the UK investor, and holds less foreign equity – 20% compared with 25%. Survey evidence indicates actual shares are 6% and 18%, respectively, making the home‐bias puzzle more acute for US than UK investors. There would seem to be more potential gains from increased international diversification for the US than the UK investor.     

Measuring the under-diversification of socially responsible investments

This article proposes a straightforward measure of the residual unsystematic risk that a selective portfolio investment strategy, such as socially responsible investment, eventually bears. The model is empirically employed in order to analyse whether the MSCI socially responsible indices bear significant levels of volatility that could be diversified by not imposing social screenings to the set of eligible investments. The study finds that a low but not negligible part of the volatility of the returns could be diversified by not restricting the investment to socially responsible companies. Implications for the socially responsible investing industry and socially responsible investors are discussed.     

The growth of relative wealth and the Kelly criterion

We propose an evolutionary framework for optimal portfolio growth theory in which investors subject to environmental pressures allocate their wealth between two assets. By considering both absolute wealth and relative wealth between investors, we show that different investor behaviors survive in different environments. When investors maximize their relative wealth, the Kelly criterion is optimal only under certain conditions, which are identified. The initial relative wealth plays a critical role in determining the deviation of optimal behavior from the Kelly criterion regardless of whether the investor is myopic across a single time period or maximizing wealth over an infinite horizon. We relate these results to population genetics, and discuss testable consequences of these findings using experimental evolution.     

Investor Attention Strategy

This article documents the motivation, the construction, and the profitability of an investment strategy based on investor attention in the options market. Using the option volume after a 1-week dormant period as a proxy for investor attention, the author shows that heightened investor attention after the dormant period has rich investment implications. A portfolio constructed on the basis of volume spike events immediately after the dormant period generates an abnormal return of 68 basis points on a monthly basis (8.16% on an annualized basis). This abnormal return is robust to risk adjustment using standard asset pricing models. The author's findings constitute strong evidence that it is profitable for outside investors to mimic attentive investors in the options market and reap economically and statistically significant profits.     

Individual Decision Making and Investor Welfare

This article analyses and quantifies the costs of suboptimal decision making for an investor with a multi-period horizon. In light of the empirical evidence that investors are too conservative and hold portfolios that are insufficiently diversified, we evaluate the costs of suboptimal equity participation both analytically and using simulation, and also estimate the costs of suboptimal diversification using simulation. We find that suboptimal leverage imposes only modest costs on the investor for reasonable parameter values. While the costs of inadequate diversification can be very high, we find that, because of the higher returns on small firms, an equally weighted portfolio of as few as five randomly chosen firms can provide the same level of expected utility as the value weighted market portfolio.
(J.E.L.: G11, G18, G23).     

Home is Where You Know Your Volatility – Local Investor Sentiment and Stock Market Volatility

Using a new variable to measure investor sentiment we show that the sentiment of German and European investors matters for return volatility in local stock markets. A flexible empirical similarity (ES) approach is used to emulate the dynamics of the volatility process by a time‐varying parameter that is created via the similarity of realized volatility and investor sentiment. Out‐of‐sample results show that the ES model produces significantly better volatility forecasts than various benchmark models for DAX and EUROSTOXX. Regarding other international markets no significant difference between the forecasts can be observed.     

Covered Call Investing in a Loss Aversion Framework

In a mean-variance framework, the covered call investment strategy has been seen as an inefficient method of allocating wealth. Covered calls reduce the riskiness of the portfolio and therefore lead to lower portfolio returns. Recent debate has focused on the shortcomings of mean-variance efficiency as an accurate depiction of investor utility. Using alternative utility functions, we find mixed support for the use of the covered call investing strategy. Using loss aversion, however, we reexamine the covered call investment decision and find it significantly enhances investor utility relative to an index portfolio investment strategy. We conclude that loss aversion's more accurate depiction of investor preferences and behavior helps to explain the popularity of the covered call investment strategy.     

The demand of energy from an optimal portfolio choice perspective

This paper analyses the demand for energy sector by employing a model form strategic asset allocation literature and quantifying the welfare losses incurred by an investor due to sub-optimal asset allocation. Our sample group includes fifteen major oil producing and consuming countries. We analyze the short-run and long-run desirability of energy sector in the optimal portfolio of an investor with varying level of risk aversion; that is, risk averse and risk tolerant investors. Our results show that the portfolio demand for energy sector is myopic or short-run. For long-run investors, investing in a portfolio of equity market and government bonds is a better proposition. In addition, energy sector is more desirable for risk tolerant investors.     

Aggregation of heterogenous beliefs,asset pricing,and risk sharing in complete financial markets

Given a competitive equilibrium in complete asset markets, we propose a method that aggregates heterogeneous individual beliefs into a single “market probability,” which, if commonly shared by investors, generates the same marginal valuation of assets by the market as well as by each individual investor. As a result of the aggregation process, the market portfolio may have to be scalarly adjusted, upward or downward, a reflection of an aggregation bias due to the diversity of beliefs. From a dual viewpoint, the standard construction of an expected utility-maximizing aggregate investor designed to represent the economy in equilibrium, is shown to be also valid in the case of heterogeneous beliefs, modulo the above scalar adjustment of the market portfolio, thereby generating an Adjusted version of the Consumption based Capital Asset Pricing Model (ACCAPM). We analyze how the allocation of aggregate and individual risks relates to deviations of individual beliefs from the aggregate market probability. Finally, we identify the channels through which the distribution of beliefs and other microeconomic characteristics (incomes, attitudes toward risk) across investors impact the pricing of risky assets an may contribute to explaining the equity premium puzzle.     

机构投资者持股与股票收益波动性——基于机构重仓股的分阶段实证研究

以2003年第4季度至2011年第2季度机构投资者持股比例超过5％的上市公司为样本,根据证券投资基金总资产净值变动的状况把机构投资者发展历程分为平缓发展期、高速发展期和调整发展期,运用面板数据模型研究机构投资者持股对上市公司股票收益波动性的影响.研究发现,在平缓发展期,机构投资者持股比例与股票收益波动性无关,持股比例变动降低了股票收益波动性;在高速发展期和调整发展期,不管是机构投资者持股比例还是持股比例变动,均与上市公司股票收益波动性正相关.     

Forward Discount Bias: Is it Near-Rationality in the Foreign Exchange Market?*

A risk-averse US investor adjusts the shares of a portfolio of short-term nominal domestic and foreign assets to maximize expected utility. The optimal strategy is to respond immediately to all new information which arrives weekly. We develop a model to estimate the cost of optimizing less frequently and find that it is generally very small. For example, if the investor adjusts portfolio shares every three months, an average expected utility loss of 0.16 per cent p.a. is incurred. Hence, slight opportunity costs of frequent optimization may outweigh the benefits. This result may help explain forward discount bias.     

Shouldn't all eggs be putted in one basket? A portfolio model based on investor sentiment and inertial thinking

In the portfolio choice literatures and the financial market, diversification and concentration are the focus of debate of philosophers. In this paper, we develop a model of portfolio choice to integrate the diversification strategy and the concentration strategy. Our model relies on the concepts of investor sentiment and inertial thinking. The results show that: Generally, when the level of sentiment is relatively low, an investor who is affected by sentiment and inertial thinking may do a well-diversified investment the same as the rational investor. When the level of sentiment is high enough, the investment strategies including diversification and concentration are complex and volatile. Quantitative results for either diversification or concentration investment are given for all cases in the paper.     

异质性预期、投资者行为与房价波动：上海和广州的双城记?

房地产市场中存在大量的投资者,其市场行为会使房价出现大幅的波动,从而引起市场不稳定。文章在引入投资者异质性预期假设的基础上,构建了包含房地产消费者、投资者、供给者在内的房地产市场均衡模型,分析了房地产市场中基本面型投资者和趋势型投资者的异质性行为对房价变动的影响,并利用上海和广州两个一线城市的实际数据进行了对比分析。研究结果表明：在房地产市场中,两类投资者对于未来房价不同的预期以及投资行为会引起房价的变动;上海投资者的行为整体上会使上海的房价始终处于不断上涨的趋势中,而广州投资者的行为会随着投资策略的转变而使静态下的“整体上推动房价趋势型变化”转变为“整体上将房价‘拉回’基本面价格”;房地产市场中的投资者占比会显著影响房价的变动趋势,当基本面型投资者占比上升时,房价偏离度和房价变动率降低,而当这类投资者占比达到峰值时,房价会出现拐点;投资者之间的策略转换速度也会通过引起基本面型投资者占比的变化,引起房价的频繁波动,而且策略转换速度越快,房价波动越频繁。     

Does aggregate uncertainty explain size and value anomalies?

This paper examines the impact of aggregate uncertainty on return dynamics of size and book-to-market ratio sorted portfolios. Using VVIX as a proxy for aggregate uncertainty, and controlling for market risk, volatility risk, correlation risk and the variance risk premium, we document significant portfolio return exposures to aggregate uncertainty. In particular, portfolios that contain small and value stocks have significant and negative uncertainty betas, whereas portfolios of large and growth stocks exhibit positive and significant uncertainty betas. Using a quasi-natural experimental setting around the financial crisis, we confirm the differential sensitivity of small versus big and value versus growth portfolios to aggregate uncertainty. We posit that due to their negative uncertainty betas, uncertainty-averse investors demand extra compensation to hold small and value stocks. Our results offer an uncertainty-based explanation to size and value anomalies.     

财务分析在证券投资中的应用

在证券市场上,投资者通过对其所关注企业信息进行分析,对未来拟投资企业的前景和内在价值的判断发生变化,并通过投资者的交易,可能导致股价发生改变。证券投资分析的信息来源包括宏观信息、行业信息和企业信息,而会计信息是证券投资决策的基础。会计信息最终通过财务报表的形式来体现,在决策分析中,相关财务指标的分析起着至关重要的作用。