Are momentum crashes pervasive regardless of strategy? Evidence from the foreign exchange market

This article studies the option-like behaviour of popular momentum strategies implemented in foreign exchange markets. The results confirm recent research findings of strong option-like behaviour for momenutm measures, based on the cumulative return from 12 and 6 months prior to the formation date Surprisingly, there is no such evidence for the popular momentum strategy accounting for a 1-month formation period.     

Option implied beta and option return

We study the information content of option-implied betas for future equity option returns, using data on the S&P 500 index options and all of the component stock options. We find a significantly strong relation between option-implied betas and option returns cross-sectional. The paper presents evidence that call (put) option returns increase (decrease) with the option-implied betas of the underlying stock. A trading strategy of buying high (low) implied beta call (put) option portfolio and selling low (high) implied beta call (put) option portfolio generates a statistically and economically significant return. Our results are robustly persistent even after controlling for various cross-sectional effects and are not explained by the risk factors in asset pricing.     

Measuring and Optimizing Portfolio Credit Risk: A Copula‐based Approach*

In this work, we present a methodology for measuring and optimizing the credit risk of a loan portfolio taking into account the non‐normality of the credit loss distribution. In particular, we aim at modelling accurately joint default events for credit assets. In order to achieve this goal, we build the loss distribution of the loan portfolio by Monte Carlo simulation. The times until default of each obligor in portfolio are simulated following a copula‐based approach. In particular, we study four different types of dependence structure for the credit assets in portfolio: the Gaussian copula, the Student's t‐copula, the grouped t‐copula and the Clayton n‐copula (or Cook–Johnson copula). Our aim is to assess the impact of each type of copula on the value of different portfolio risk measures, such as expected loss, maximum loss, credit value at risk and expected shortfall. In addition, we want to verify whether and how the optimal portfolio composition may change utilizing various types of copula for describing the default dependence structure. In order to optimize portfolio credit risk, we minimize the conditional value at risk, a risk measure both relevant and tractable, by solving a simple linear programming problem subject to the traditional constraints of balance, portfolio expected return and trading. The outcomes, in terms of optimal portfolio compositions, obtained assuming different default dependence structures are compared with each other. The solution of the risk minimization problem may suggest us how to restructure the inefficient loan portfolios in order to obtain their best risk/return profile. In the absence of a developed secondary market for loans, we may follow the investment strategies indicated by the solution vector by utilizing credit default swaps.     

Another look at momentum crashes: momentum in the European Monetary Union

This article studies the profitability of a selection of prominent momentum-based strategies in the European Monetary Union (EMU). In contrast to past examples documenting the lack of profitability of unconditional price momentum in the most recent decade, the current research finds that unconditional price momentum yielded significant positive payoffs. There is evidence of option-like behaviour for strategies based on intermediate past performance. Surprisingly, there is no such evidence for the momentum strategy based on recent past performance.     

A contingent claim analysis of a rate-setting financial intermediary

Realizing that a financial intermediary's lending, treated as an investment opportunity, is like a financial call option clarifies the role of uncertainty. We argue that the portfolio-theoretic approach and the firm-theoretic approach have important linkages that can be used to demonstrate the contingent claim analysis of a rate-setting financial intermediary. Borrower-intermediary-lender relationships between the portfolio-theoretic combined volatilities and the firm-theoretic rate-setting modes under the Black-Scholes valuation are investigated, and the conclusions depend upon the portfolio composition redistribution effect. The effect of changes in the open market security rates on the loan rate and deposit rate settings depend on the borrower-intermediary-lender relationship, portfolio risk, and management of rate-setting strategy. Moreover, movements in open market security rates are not necessarily transmitted to the loan lender and deposit absorber.     

A novel nonlinear value-at-risk method for modeling risk of option portfolio with multivariate mixture of normal distributions

This paper proposes a novel nonlinear model for calculating Value-at-Risk (VaR) when the market risk factors of an option portfolio are heavy-tailed. A multivariate mixture of normal distributions is used to depict the heavy-tailed market risk factors and accordingly a closed form expression for the moment generating function that can reflect the change in option portfolio value can be derived. Moreover, in order to make use of the correlation between the characteristic function and the moment generating function, Fourier-Inversion method and adaptive Simpson rule with iterative algorithm of numerical integration into the nonlinear VaR model for option portfolio are applied for calculation of VaR values of option portfolio. VaR values of option portfolio obtained from different methods are compared. Numerical results of Fourier-Inversion method and Monte Carlo simulation method show that high accuracy VaR values can be obtained when risk factors have multivariate mixture of normal distributions than when they have normal distributions. Moreover, VaR values obtained by using the Fourier-Inversion method are not obviously different from VaR values obtained by using Monte Carlo simulation when market risk factors have normal distributions or multivariate mixture of normal distributions. However, the speed of computation is obviously faster when using Fourier-Inversion method, than when using Monte Carlo simulation method. Besides, Cornish Fisher method is faster and simpler than Monte Carlo simulation method or Fourier-Inversion method. However, this method does not offer high accuracy and cannot be used to calculate VaR values of option portfolio when market risk factors have heavy-tailed distributions.     

The sources of momentum in international government bond returns

This study aims to offer a new explanation for the momentum effect in international government bonds. Using cross-sectional and time-series tests, we examine a sample of bonds from 22 countries for the years 1980 through 2018. We document significant momentum profits that are not attributable to bond-specific risk factors, such as volatility or credit risk. The global bond momentum is driven by the returns on underlying foreign exchange rates. Controlling for currency movements fully explains the abnormal returns on momentum strategies in international government bonds. The results are robust to many considerations including alternative sorting periods, portfolio construction methods, as well as subperiod and subsample analysis.     

中国银行业构建现代信用风险管理模式的思考

针对信用风险的复杂特征,按照比较完善的市场风险管理模型方法可以构建现代信用风险管理模型。同时,在信息系统和内部风险评级逐步完善、信用衍生工具广泛使用的前提下,可以引入现代资产组合管理理论的思想、方法与技术,实施信用风险管理的资产组合管理方法,进而实现现代信用风险管理。重点研究现代信用风险管理的一般模式,并在此模式下,探讨中国实际背景下银行业的战略选择问题,指出完善信息管理信息系统和内部评级体系以及进一步研究信用衍生工具等金融创新的具体思路。     

Combining value and momentum: evidence from the Nordic equity market

This is the first article that explores the recently proposed average ranking approach for the value and momentum strategy in the Nordic equity market offering an exceptional experimental environment. Our results indicate that in the Nordic stock markets, the value anomaly offered excess returns in the 1993–2017 sample period only when small stocks were a part of the portfolio, whereas the momentum effect is strong and significant, irrespective of size. Interestingly, our findings also indicate that the negative correlation between value and momentum seems to be driven by growth stocks: Winner stocks that are value stocks generated 1.66% per month on average, whereas winner stocks that are growth stocks exhibit virtually the same average payoff. On the other hand, the spread between value and growth stocks that are loser stocks is on average 0.97% per month.     

A risk index to model uncertain portfolio investment with options

This paper models the portfolio investment performance with options by using a risk index, which is defined as the average loss below the risk-free interest rate. Using a risk-free interest rate as the uniform reference rate for all portfolios, the risk index offers an easier-to-compare loss value than the value-at-risk return, where portfolio specific references are used to calculate the average losses. Besides, uncertainty theory is used in the paper to derive the portfolio decision when stock prices are subject to experts' estimations. By analytical computation and empirical analysis, we find that portfolios considering options generate better return than the ones without options. The empirical analysis reveals that the options can effectively hedge the risk, and the call option with a higher exercise price offers higher return per unit of option premium. Furthermore, our proposed model produces higher expected return in most cases than the model where the risk is measured by the chance of the total return failing to reach the threshold level of return.     

Mesdames et Messieurs,momentum performance is not so abnormal after all!

This article provides evidence regarding the performance of momentum investment strategies that is consistent with the Neoclassical Theory. More specifically, while momentum investment returns appear orthogonal to systematic risk in the extant literature, this article illustrates that they are due to correlated changes of hedge portfolio systematic risk exposures with market conditions. Momentum portfolios are excellent market timers in both expanding and contracting markets. Their returns however are generally not abnormal when timing is considered in an augmented unconditional Capital Asset Pricing Model (CAPM), while the standard version erroneously considers them to be so, possibly explaining why momentum studies have so far rejected the Neoclassical Theory.     

Evidence of price discovery on the Indonesian stock exchange

The Indonesian stock market is emerging and very little is known about price discovery mechanisms. This paper addresses this research gap by compiling and utilizing a unique stock-level dataset (consisting of 342 stocks) to examine existence and behaviour of price discovery processes. Using the Indonesian sectoral spot price index, and the Bloomberg Markit iTraxx Asia and the CDX high yield index, we test for price discovery. Our findings suggest that pricing behaviour on Indonesian stock exchange is contributed by the credit risk market. We also note that our findings are robust to a different measure of credit risk.     

基于亚超度量空间的信用风险关联结构分析

将亚超度量空间的分析范式引入信贷组合管理,用以确定行业信用风险的关联结构。在构建行业信用风险指数的基础上,运用最小生成树确定唯一的行业信用风险指数分层结构,并利用系统聚类方法将样本行业分为强周期行业、防御型行业、成长型行业和弱周期行业。基于亚超度量空间,可将信贷资产组合分为同质资产组合和异质资产组合,从而实现信贷组合管理的降维处理,并提高商业银行等金融机构的信用风险管理效率。     

Integrated Risk Management with a Filtered Bootstrap Approach

We present a multi-period risk model to measure portfolio risk that integrates market risk, credit risk and, in a simplified way, liquidity risk. Thus, it overcomes the major limitation currently shared by many risk models that are unable to give a complete picture of all portfolio risks according to a single, coherent framework. The model is based on the Filtered Bootstrap approach; hence, it captures conditional heteroskedasticity, serial correlation and non-normality in the risk factors, that is, most of the features of observed financial time series. Being a simulation risk model, it copes in a natural way with derivatives as it allows the full valuation of the probability density function of the contracts. In addition, it is a suitable and flexible way to generate future scenarios on medium‐term horizons, so this model is particularly appropriate for asset management companies.     

The Credit Crisis and De Nova Mimicking in Security Analysis

The failure of the investment community in 2007 to foresee the systematic collapse of the credit default swap market significantly increased the complexity of security analysis and damaged the reputation of the security analyst community in general. submit that in response to the credit crisis, security analysts may have engaged in a de nova form of mimicking by increasing emphasis on general market factors and reducing emphasis on idiosyncratic factors in their valuations, driven by behavioral motives to achieve increased cost efficiency and avoid higher penalties for unfavorable outlier valuations. The result would be increased correlation among security valuations and therefore returns, and diminished benefits of diversification. We test this hypothesis by examining the patterns of security and portfolio returns surrounding the onset of the credit crisis in early 2007 and observe a significant postcrisis increase in the proportion of security and portfolio returns explained by market factors. The findings support the hypothesized shift in emphasis in security analyst valuation techniques, and provide results consistent with the hypothesized behavioral explanations.     

An experimental study of the impact of competition for Other People’s Money: the portfolio manager market

In this paper we experimentally investigate the impact that competing for funds has on the risk-taking behavior of laboratory portfolio managers compensated through an option-like scheme according to which the manager receives (most of) the compensation only for returns in excess of pre-specified strike price. We find that such a competitive environment and contractual arrangement lead, both in theory and in the lab, to inefficient risk taking behavior on the part of portfolio managers. We then study various policy interventions, obtained by manipulating various aspects of the competitive environment and the contractual arrangement, e.g., the Transparency of the contracts offered, the Risk Sharing component in the contract linking portfolio managers to investors, etc. While all these interventions would induce portfolio managers, at equilibrium, to efficiently invest funds in safe assets, we find that, in the lab, Transparency is most effective in incentivising managers to do so. Finally, we document a behavioral “Other People’s Money” effect in the lab, where portfolio managers tend to invest the funds of their investors in a more risky manner than their Own Money, even when it is not in either the investors’ or the managers’ interest to do so.     

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.     

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.     

上海股票市场动量效应研究——基于1995—2009年周收益率数据

利用1995年1月至2009年12月期间上海证券交易所所有A股股票的日收益率数据,以本周四到下周三为一个周期计算周收益率,采用重叠抽样方法,对上海股票市场的动量效应进行实证研究。结果表明:上海股票市场存在动量效应现象,但动量效应持续的期限要短于西方发达国家的股票市场;当形成期为1周、持有期为1~3周时,投资策略组合表现出显著的动量效应;当形成期大于1周、持有期超过3周时,投资策略组合开始出现收益反转现象;当持有期和形成期增大到12~26周时,投资策略组合又表现出不显著的动量效应。     

Deregulation, market power and risk behaviour in Spanish banks

This paper provides empirical evidence on the effects of regulatory changes in the market power of Spanish banks. It also analyses the response of banks, in terms of risk-taking behaviour, as a result of a reduction in economic profits. We find that liberalisation measures have increased competition and eroded banks’ market power. We observe that banks with lower charter values tend to have lower equity-assets ratios (lower solvency) and to experience higher credit risk. The last evidence is new in the literature and calls for strengthening regulatory concerns about credit risk management by banks in situations of increased competition.