Quantifying South Africa's crude oil import risk: A multi-criteria portfolio model

A major consequence of South Africa's strong economic growth since the democratic dispensation of 1994 is the rapid increase in domestic demand for oil energy. With small amounts of proven oil reserves, the rise in oil demand as an energy source has resulted in South Africa's growing dependence on external sources for its domestic crude oil needs. High oil prices, instability in major oil producing regions and the rise in ‘oil-nationalism’ are major concerns for the security of South Africa's oil supplies. Accordingly, a comprehensive understanding of oil import security risks can serve as a vital guide in formulating any energy policy framework(s) aimed at alleviating the impact of such risks. This study utilises portfolio theory and develops an empirical framework to provide quantitative measures of systematic and specific risks of South Africa's crude oil imports over the period 1994 to 2007. The paper examines the relationship between supply sources diversification and oil energy security risks, and provides an objective evaluation of different import adjustment strategies on South Africa's total crude oil import risks. The results show that a policy of having constant monthly imports from each supply region reduces the specific and systematic risks of the oil import portfolio by an average rate of 71% and 2.9% respectively. Significant reduction in specific risks of South Africa's oil imports is achieved if imports from risky regions (mainly the Middle East) can be diversified to relatively less risky regions of Europe and North America.     

Optimal diversification and risk-taking: a theoretical and empirical analysis

Among the justifications for capital property income received by private households is that it is a ‘return to risk-taking’. However, portfolio diversification provides an obvious means toward the reduction of risk. Moreover, it is widely believed that the wealthier the household, the more diversification it practices: the larger tends to be the proportion of its total portfolio allocated to publicly traded stock, and the larger tends to be the number of individual stock issues included in its portfolio. Using a simple ‘homogeneous securities’ model, explicit functional forms are obtained for both the optimal proportion of the portfolio allocated to stocks, and the optimal number of individual stock issues in the portfolio. Empirical evaluation of these theoretical results, using a dataset derived from the 2004 Survey of Consumer Finances (SCF), lends substantial support to the model. Applying these empirical results, it is found that as household capital wealth increases, expected capital income increases while simultaneously a reasonable risk indicator (the probability of incurring a negative return on the capital portfolio) decreases owing to the higher level of portfolio diversification. This indication casts significant doubt on the ‘return to risk-taking’ justification for capital property income received by wealthy private households.     

Volatility states and international diversification of international stock markets

This study uses a Markov-switching technique to identify the volatility state of international stock markets. Further, we consider four possible state combinations of the individual and world stock markets to examine an interesting issue regarding the relationship between international diversification and market volatility. Last, we adopt a framework based on the state-varying correlation to establish a more efficient international investment strategy. Our empirical results are consistent with the two following notions. First, the situation of both the individual and world stock markets during high volatility states will be associated with the minimum benefit of risk-reduction from international diversification and a maximum cross-market correlation. Second, by incorporating the character of state-varying correlation into the establishment of an international portfolio, we can create a more efficient investment strategy with less risk, or greater return for a given risk.     

Tail dependence risk exposure and diversification potential of Islamic and conventional banks

This paper undertakes a rolling window comparative analysis of risks for portfolios consisting of GCC Islamic and conventional bank indices. We draw our empirical results by employing canonical, drawable and regular vine copula models, as well as by implementing a portfolio optimization method with a conditional Value-at-Risk constraint. We find evidence of higher riskiness in the group of Islamic banks relative to the group of conventional banks across each of the financial rolling window scenarios under consideration. Specifically, a greater negative (nonlinear) tail asymmetric dependence is observed in the pairs of Islamic banks’ relationships. The results also show that the optimal portfolio model supports a clear preference towards the group of conventional banks in regard to risk minimization and diversification benefits.     

Performance and diversification benefits of foreign-equity ETFs in emerging markets

This study provides a comprehensive review of the risk-return characteristics, performance and international diversification benefits of an uncharted fast-growing segment of the global exchange-traded fund (ETF) market by examining 17 foreign-equity ETFs traded in 6 emerging markets. The results indicate that the sample ETFs domiciled in these economies perform poorly providing relatively low returns while exposing emerging market investors to substantial total and systematic risks. In addition, these ETFs are found to be more sensitive to downside risk, making them relatively more vulnerable to market downturns. Although the foreign-equity ETFs are designed to provide investors with full international diversification benefits, we find that they are significantly affected by their local market conditions and sentiments, making them ineffective international diversification tools.     

Do oil producing countries offer international diversification benefits? Evidence from GCC countries

This paper provides evidence of the existence of diversification benefits in international stock markets when oil producing countries are included in a global portfolio. Moreover, it examines whether recent oil shocks and financial events have significant impact on the conditional correlations and diversification benefits. Using stock returns from developed, emerging, GCC countries and a global portfolio, the empirical findings show that while developed and emerging stock markets have experienced increased correlations over relatively long periods of time, the correlation in GCC stock markets remained low and constant offering high diversification benefits. Interestingly, the paper also finds that, during 2012–2014, the rising conditional correlation levels have reversed trends in developed and emerging markets alike offering more potential for international diversification. Our results are robust to model selection, data frequency, and innovations distribution.     

Tail dependence and diversification benefits in emerging market stocks: an extreme value theory approach

This article examines tail dependence, the benefits of diversification and the relation between the two for emerging stock markets. We find most emerging equity markets are independent in limiting joint extremes. However, the dependence in finite levels of extremes is still much stronger than the dependence implied by multivariate normality. Therefore, simple correlation analysis can lead to gross underestimation of the chances of joint crashes in multiple markets. Assuming risk-averse investors guarding against extreme losses, diversification benefits are measured for each two-country optimal portfolio by the reduction in quantile risk measures such as value-at-risk and expected shortfall relative to an undiversified portfolio. It is shown that tail dependence measures developed from multivariate extreme value theory are negatively related to diversification benefits and more importantly can explain diversification benefits better than the correlation coefficient at the most extreme quantiles.     

略论中国外汇储备面临的潜在资本损失

本文分析了中国巨额外汇储备面临的由本币升值汇率风险而导致的资本损失。文章从两个角度来研究该项损失:一是从央行资产负债表由于货币错配而招致的现实以及潜在资本损失的角度;二是从以一篮子货币或者一篮子商品来衡量的中国外汇储备国际购买力损失的角度。本文的结论是:中国央行资产负债表面临的资本损失是显著的;中国外汇储备国际购买力的波动显著高于市场价值的波动,尤其是用油价来衡量的外汇储备购买力波动相当剧烈。     

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.     

Linking global economic dynamics to a South African-specific credit risk correlation model

In order to address practical questions in credit portfolio management it is necessary to link the cyclical or systematic components of firm credit risk with the firm's own idiosyncratic credit risk as well as the systematic credit risk component of every other exposure in the portfolio. This paper builds on the methodology proposed by Pesaran, Schuermann, and Weiner [Pesaran, M.H., Schuermann, T., and Weiner, S.M., (2004), Modeling regional interdependencies using a global error correcting macroeconometric model, Journal of Business and Economic Statistics, 22, 2, 129–169.] and supplemented by Pesaran, Schuermann, Treutler and Weiner [Pesaran, M.H., Schuermann, T., Treutler, B., and Weiner, S.M., (2006), Macroeconomic dynamics and credit risk: a global perspective, Journal of Money, Credit, and Banking, Volume 38, Number 5, August 2006, 1211–1261.] which has made a significant advance in credit risk modelling in that it avoids the use of proprietary balance sheet and distance-to-default data, focusing on credit ratings which are more freely available.In this paper a country-specific macroeconometric risk-driver engine which is compatible with and could feed into the GVAR model and framework of PSW (2004) is constructed, using vector error-correcting (VECM) techniques. This allows conditional loss estimation of a South African-specific credit portfolio but also opens the door for credit portfolio modelling on a global scale, as such a model can easily be linked to the GVAR model. The set of domestic factors is extended beyond those used in PSW (2004) in such a way that the risk-driver model is applicable for both retail and corporate credit risk. As such, the model can be applied to a total bank balance sheet, incorporating the correlation and diversification between both retail and corporate credit exposures.Assuming statistical over-identification restrictions, the results indicate that it is possible to construct a South African component for the GVAR model that can easily be integrated into the global component. From a practical application perspective the framework and model is particularly appealing since it can be used as a theoretically consistent correlation model within a South African-specific credit portfolio management tool.     

Market Size and Investment Performance of Defaulted Bonds and Bank Loans: 1987–2001

The defaulted and distressed, public and private debt markets in the United States swelled to a record $680 billion (face value) at the end of 2001. The market value of this 'niche' segment was approximately $400 billion.
Defaulted security investors enjoyed an excellent year on average, as returns in 2001 were 17.5 per cent on bonds, 13.9 per cent on bank loans, and 15.6 per cent combined defaulted public bonds and private bank loans.
The Altman–New York University Salomon Center Index of Defaulted Bonds grew to over 200 individual issues and a face value of $56.2 billion; the market value was only $11.8 billion. The market–to–face value ratio of the Bond Index grew somewhat to 0.21 from 0.15 one year ago, but remained at a relatively low figure. The face value of our Defaulted Bank Loan Index also grew to $44.7 billion and the market–to–face value ratio remained quite low at 0.53.
The recovery rate on defaulted bonds (price just after default) was very low at 25 cents on the dollar; likewise, the bank loan recovery rate in 2001 was also relatively low at 55 cents on the dollar. With new defaulted bonds rising in 2001 to a record $63.6 billion (default rate of 9.80 per cent) and the default outlook for 2002 high investment opportunities should abound in the distressed debt market.
Indications are that distressed investors (both old and new) are successfully raising funds because investor expectations are buoyant.
(J.E.L.: G21, G33).     

Designing social security - a portfolio choice approach

Public social security systems may provide diversification of risks to individuals’ life-time income. Capturing that a pay-as-you-go system (paygo) may be considered as a “quasi-asset”, we study the optimal size of the paygo system as well as the optimal split between funded and unfunded pension saving by means of a theoretical portfolio choice framework. A low-yielding paygo system can benefit individuals if it contributes to hedge other risks to their lifetime resources. Numerical calculations indicate that optimal social security systems should be at least partly paygo financed in many economies. The optimal magnitude of the paygo system depends on the specified risk concept as well as the stochastic properties of stock market returns and implicit paygo-returns.     

Teams take the better risks

One reason why decision makers are often teams and not individuals may be that team decisions comply more closely with economic rationality. We compare individual and team decisions, when systematic deviations from the expected utility theory (EUT) and the portfolio selection theory (PST) are to be expected. We find almost no evidence for the greater compliance of team decisions with the principles of EUT. However, there is substantial evidence for the consistency of team decisions with the PST. Compared to individuals, teams accumulate significantly more expected value at a significantly lower total risk (measured in standard deviation, S.D.).     

The industrial relationships in time-varying beta coefficients between Korea and United States

This article examines financial linkage of systematic risks for 20 industry portfolio returns between Korean and US stock markets. Time-varying beta coefficients of Capital Asset Pricing Model are estimated and Granger-causality tests are carried out for identifying the significance of the industrial relations between the two stock markets. The empirical findings show that the strength and the causality of international financial linkage vary depending on the types of industry and the shocks in the systematic risk. Some Korean industries, including financing industries, iron and metal industries, service, and textile and wearing industries are relatively vulnerable to systematic risk associate with US industries.     

Can the Risks of the Kyoto Mechanisms be Reduced Through Portfolio Diversification? Evidence from the Swedish AIJ Program

Through Joint Implementationand the Clean Development Mechanism, reductionsof greenhouse gas emissions achieved abroad canbe credited to domestic firms. However, thetechnical, economic and political risksinvolved may prevent the private sector frominvesting in such projects. This paperdescribes three types of risks which emissionreduction projects are exposed to. Eleven pilotprojects carried out under the ActivitiesImplemented Jointly (AIJ) program and financedby Sweden are evaluated. Actual project costsare found to exceed projected costs in allcases. Annual emission reductions also deviatefrom their expected values and vary stronglyover time, supporting the hypothesis that suchprojects are risky business. The riskmanagement tool portfolio diversification isapplied to a sample of Swedish AIJ projects.The results indicate that diversification canreduce the risks of greenhouse gas mitigationprojects significantly. Thus, carbon funds area promising way of lowering the risks of theKyoto Mechanisms for private sector investors.     

Further evidence on international Islamic and conventional portfolios diversification under regime switching

This article investigates the comparative performance of International Islamic and conventional portfolio diversification across different financial market regimes and provides an optimal choice from an American investor’s viewpoint during the period 2002–2014. Using a bootstrap-based stochastic dominance (SD) test and monthly MSCI prices of Islamic stock market indices and their conventional counterparts in 38 countries from North and Latin America, Europe and Asia-Pacific regions, we find that SD relationships between Islamic and conventional optimal-diversified portfolios change systematically according to investment region and market regime. Essentially, for all regimes, US investors are indifferent between Islamic diversification and its conventional counterpart, which implies that arbitrage diversification opportunities are rare and short lived in all regions. However, across all regions, especially in a crisis regime, Islamic portfolio diversification can be a good substitute for conventional diversification. Islamic portfolio diversification in North and Latin America, Europe and Global regions is an optimal choice for the risk-averse American investors. Finally, results imply that portfolio diversification among Islamic market indices can be a good hedge, offering investors superior investment alternatives during any financial meltdown or economic slowdown due to the conservative nature of Sharia-compliant investments.     

Diversification and optimal hedges for socially responsible investment in Brazil

This study contributes to the literature on socially responsible investing by examining the diversification potential of commodities, specifically oil, gold and clean energy together with the Brazilian Corporate Sustainability Index (ISE). Multivariate GARCH models are used to model volatility spillovers and conditional correlation in pairs of stocks containing ISE. Specifically, A-BEKK and A-DCC models with spillovers are estimated. The models’ results are used to compute and analyze the optimal weights and hedge ratios for stock portfolio holdings. The greatest benefit from diversification is obtained through the acquisition of gold and then OVX.     

Bank capital requirements and mandatory deferral of compensation

We analyze the interplay of capital requirements and mandatory deferral of compensation in reducing banks’ risk taking incentives. Two heterogenous banks fund uncorrelated projects with fully diversifiable risk or correlated projects with systematic risk. One of both banks can identify project types and is superior at managing risks. If projects are in abundant supply, full mandatory deferral of compensation is optimal as it allows a larger banking sector without increasing the default risk. With limited supply of projects, deferred compensation may misallocate risky projects to the bank that is inferior at managing risks, so that early compensation may be optimal.     

Bitcoin—A hype or digital gold? Global evidence

This study explores whether Bitcoin constitutes as a hedging instrument whilst seeking portfolio diversification opportunities among sustainable, conventional and Islamic asset classes since Bitcoin emerges as a distinct alternative investment and asset class across the world. We apply multivariate generalised autoregressive conditional heteroscedastic-dynamic conditional correlation and continuous wavelet transforms based on the recent data set ranging from August 18, 2011, to September 10, 2018. First, our findings show that Bitcoin returns are mean-reverting which implies that its value tends to come down to mean value in the long run and not completely crushed to zero irrespective of price changes suggesting Bitcoin as a sustainable asset class. Second, the time-invariant model shows that Bitcoin offers portfolio diversification opportunities with almost all equity indices, in particular, Dow Jones Islamic followed by FTSE 4 Good index. Finally, the time-variant analysis reconfirms that Bitcoin offers portfolio diversification benefits both in the short and long run. These findings carry meaningful policy considerations for fund managers and cross-country investors.     

Portfolio Theory and Foreign Investment ? The Role of Non-Marketed Assets

Far from thinking the extent of foreign investment in Australia is large, economists ought perhaps be surprised that the extent is not greater. Certainly, portfolio diversification theory would seem to predict Australians would own a small share of their marketable wealth in Australian marketed assets. We show that when domestic residents in a small open economy possess non-marketable wealth (so that securities markets are not complete), domestic marketed assets may be disproportionately demanded by residents to hedge their non-marketed risks.