Equity Home‐Bias: A Suboptimal Choice for UK investors?

In spite of the popularity of international portfolio diversification theory, extant empirical literature shows that investors prefer domestic assets and as a result, many studies argue that investors' portfolios are largely suboptimal. This paper examines whether British investors need to diversify their portfolios internationally to gain performance benefits from international markets or can they obtain these benefits by mimicking the portfolios with domestically traded assets. The results confirm that it is possible to mimic the performance of foreign equity with domestic equity. Indeed, the pay‐offs from homemade portfolios outperform those from international portfolios regardless of the periodic variation in the overall performance of the UK market vis‐à‐vis foreign markets. The superiority of homemade portfolio is more prominent in recent years and is enhanced by the increased internationalisation of developed capital markets. Therefore, investors' home bias is not suboptimal.     

Do Inflation‐Linked Bonds Still Diversify?

The diversifying power of inflation-linked (IL) bonds relative to traditional asset classes has changed significantly. In this paper, we study the dynamics of conditional volatilities and correlations for three asset classes, IL bonds, nominal bonds and equities, in the USA and Europe. Using a DCC-MVGARCH for the period 1997–2007, we highlight the change that took place in 2003. Although IL bonds once had definite diversification power, they are now highly correlated with nominal bonds and have reached similar volatility levels. As a result, the two asset classes are practically substitutable. This seems to be due to more stable inflation expectations and to a more liquid IL bond market. Although diversification was a valuable reason for introducing IL bonds in a global portfolio before 2003, this is no longer the case. Dynamic portfolio optimisation using our estimates of conditional correlations and volatilities clearly demonstrates that the optimal weight of IL bonds in a portfolio decreased sharply in 2003 in favour of nominal bonds and equities.     

Risk–Return Profiles of Islamic Equities and Commodity Portfolios in Different Market Conditions

Motivated by the recent phenomenal growth in Islamic finance and the financialization of commodities, this study makes an initial attempt to investigate the risk–return profiles of optimized portfolios combining (a) Islamic equities with commodities and (b) conventional equities with commodities during the crises and noncrises periods. The findings tend to indicate that Islamic equity–commodity portfolios provide relatively higher diversification benefits than the conventional equity–commodity portfolios during the 1997 Asian Financial Crisis triggered by the financial sector compared to the 2008 global financial crisis triggered by the real housing sector. The findings further suggest that except for a few cases, commodities in general and gold in particular improve diversification benefits.     

Is Gold a Hedge or a Safe Haven? An Analysis of Stocks,Bonds and Gold

Is gold a hedge, defined as a security that is uncorrelated with stocks or bonds on average, or is it a safe haven, defined as a security that is uncorrelated with stocks and bonds in a market crash? We study constant and time‐varying relations between U.S., U.K. and German stock and bond returns and gold returns to investigate gold as a hedge and a safe haven. We find that gold is a hedge against stocks on average and a safe haven in extreme stock market conditions. A portfolio analysis further shows that the safe haven property is short‐lived.     

Is portfolio diversification possible in integrated markets? Evidence from South Eastern Europe

A remarkable process of financial integration has taken place throughout the world capital markets over the last decades. In line with this integration process, the effect of financial integration locally and/or globally has been one of the contemporary topics of interest to academics, practitioners as well as policy makers. In this study, we investigate the availability of portfolio diversification benefits after the initiation of the South Eastern Europe Link (the SEE Link) trading platform in 2016 as a connecting hub for stock markets in the South Eastern European region. Our empirical methodology is primarily based on various static and dynamic correlation (Dynamic Conditional Correlation-GARCH) and regression (Autoregressive Distributed Lag, Fully Modified Ordinary Least Squares, Dynamic Ordinary Least Squares, Markov Switching Regression Model and Kalman Filter Model) analyses. We employ our methods for a daily frequency stock exchange (namely, the Zagreb Stock Exchange and Bulgarian Stock Exchange) return data between January 4, 2005 and December 30, 2019. The findings reveal that the two stock exchanges have a significantly decreasing pattern of correlation and regression relationship over the sample period implying the existence of diversification opportunities in the SEE Link markets.     

An International Investigation of the Factors that Determine Conditional Gold Betas

We investigate the unconditional and conditional gold betas of four country‐based gold industry portfolios. First, we document the similarity of unconditional gold betas across countries. Second, we find that the factors affecting conditional gold betas are different in the Australian and South African gold sectors relative to their North American counterparts. Only the gold bullion return volatility shows a negative association with conditional gold betas in Australian and South African gold mining firms. Moreover, gold price does not appear to play a systematic role in determining Australian or South African conditional gold betas. We discuss possible explanations for these findings.     

Does the Quality of Financial Advice Affect Prices?

Using a large data sample of 58,562 new municipal issues covering the period from 1984 to 2002, we examine whether the quality of advice provided by a financial advisor affects new issue interest costs. We find that higher‐quality financial advisors are associated with statistically significant decreases in new issue yields. The effect of advisor quality on yields is more pronounced for revenue, negotiated, and opaque bond issues than for general obligation and competitively sold issues. However, issuers of revenue or negotiated bonds are more likely to choose a low‐quality advisor.