Life-cycle portfolio choice with liquid and illiquid financial assets

Traditionally, quantitative models that have studied households׳ portfolio choices have focused exclusively on the different risk properties of alternative financial assets. We introduce differences in liquidity across assets in the standard life-cycle model of portfolio choice. More precisely, in our model, stocks are subject to transaction costs, as considered in recent macroliterature. We show that when these costs are calibrated to match the observed infrequency of households׳ trading, the model is able to generate patterns of portfolio stock allocation over age and wealth that are constant or moderately increasing, thus more in line with the existing empirical evidence.     

Marriage and other risky assets: A portfolio approach

We study the joint impact of gender and marital status on financial investments by testing the hypothesis that marriage represents – in a portfolio framework – a sort of safe asset and that this attribute may change over time. We show that married individuals have a higher propensity to invest in risky assets than single ones, that this marital status gap is stronger for women and that, for women only, it evolves and declines at the end of the sample period. Next we explore a number of possible explanations of the observed gender differences by controlling for background factors that capture the evolution of family and society. We find that both the higher female marital status gap and its time variability vanish for those women who are employed. Our empirical investigation is based on a dataset drawn from the 1993–2006 Bank of Italy Survey of Household Income and Wealth.     

Optimal portfolio choice of gold assets in the differential market and differential game structures

Portfolio choices of gold-related assets for market investors and dealers may not only depend on price differences and the inflation rate, but may also react to the market participants’ strategic behavior and risk attitude. This study develops a two-agent stochastic differential game model to solve the portfolio choice problem of the asset allocations of gold spot, futures, and cash for market participators who are exposed to inflation risks. The equilibrium prices of spot and futures driven by the volatility rate and co-variances that reflect various risk sources are also determined. Specifically, regarding the choice of hedging tools, market participators may prefer gold spot to futures for the purpose of hedging inflation risk. By capturing the stylistic facts of differential market and multiple agent structures, the article can develop a more reasonable and practical model to usefully explain the gold portfolio choices and pricing in the gold markets.     

Robust estimation of covariance and its application to portfolio optimization

Outliers can have a considerable influence on the conventional measure of covariance, which may lead to a misleading understanding of the comovement between two variables. Both an analytical derivation and Monte Carlo simulations show that the conventional measure of covariance can be heavily influenced in the presence of outliers. This paper proposes an intuitively appealing and easily computable robust measure of covariance based on the median and compares it with some existing robust covariance estimators in the statistics literature. It is demonstrated by simulations that all of the robust measures are fairly stable and insensitive to outliers. We apply robust covariance measures to construct two well-known portfolios, the minimum-variance portfolio and the optimal risky portfolio. The results of an out-of-sample experiment indicate that a potentially large investment gain can be realized using robust measures in place of the conventional measure.     

Loss-aversion and household portfolio choice

In this paper we empirically test if loss-aversion affects household participation in equity markets, household allocations to equity, and household allocations between mutual funds and individual stocks. Using household survey data, we obtain direct measures of each surveyed household's loss-aversion coefficient from questions involving hypothetical payoffs. We find that higher loss-aversion is associated with a lower probability of participation. We also find that higher loss-aversion reduces the probability of direct stockholding by significantly more than the probability of owning mutual funds. After controlling for sample selection we do not find a relationship between loss-aversion and portfolio allocations to equity.     

我国金融资产与不动产财富效应的时间特征及其含义

从静态比较和时间变化特征看,我国居民金融资产和不动产的财富效应都很微弱。金融资产的平稳增长及其相对较强的流动性使金融资产略大于住房资产的财富效应。住房消费的条件限制、价格过快上涨及流动性约束,抑制消费需求的扩大。消费对收入存在过度敏感性削弱了两种资产的财富效应。为了通过财富效应来促进消费,必须增强政策的可预见性,形成股市和房地产市场稳定的预期,促进两个市场的平稳发展,适度增强金融资产和住房资产的流动性。     

Modeling the dependence structures of financial assets through the Copula Quantile-on-Quantile approach

This paper considers a new approach of analyzing asset dependence by estimating how the distributions (in particular, quantiles) of assets are related. Combining the techniques of quantile regression and copula modeling, I propose the Copula Quantile-on-Quantile Regression approach to estimate the correlation that is associated with the quantiles of asset returns, which is able to uncover obscure nonlinear characteristics in asset dependence. The estimation procedure proposed here can also be used for analyzing dependence structures in other settings, such as for studying how macroeconomic covariates are nonlinearly related by looking at the relationship between their quantiles.     

A multivariate analysis of REIT performance by financial and real asset portfolio characteristics

This paper examines the risk-adjusted performance of real estate investment trusts (REITs) from 1986 through 1990 in relation to financial and property characteristics of their portfolios. The Sharpe measure of risk-adjusted rate of return was regressed against financial ratios and property investment ratios for a sample of equity and mortgage REITs. The results show that, in general, financial ratios (gross cash flow, leverage, asset size), regional location of properties, and types of real estate investments determine the risk-adjusted performance. More specifically, location of properties in the western United States, ownership of health care properties, and investment in securitized mortgages positively affect the risk-adjusted return. The individual financial variables were not found to be statistically significant in influencing REIT returns.     

Forced retirement risk and portfolio choice

Current literature on the effect of labor income on portfolio choice overlooks that workers face a risk of being forced to retire before their planned retirement age. Using data from the Health and Retirement Study, this paper finds that the forced retirement risk is both significant and highly correlated with stock market fluctuations. Using a life-cycle portfolio choice model, this paper shows that forced retirement risk makes labor income near retirement stock-like. Therefore, contrary to conventional wisdom, those who are still working but near retirement should have a lower share of risky assets in their financial portfolios than retirees do.     

Tail dependence between Bitcoin and financial assets: Evidence from a quantile cross-spectral approach

Using daily price data for Bitcoin and 10 representative financial assets from the stock, commodity, gold, foreign exchange and bond markets from 2011 to 2019, we study the tail dependence between returns for Bitcoin and these other financial assets using the novel “quantile cross-spectral dependence” approach of Baruník and Kley (2019). We find evidence of right-tail dependence between Bitcoin returns and the S&P 500 in the long term and weaker normal return dependence between Bitcoin and the US Dollar (USD)–Euro (EUR) foreign exchange rate in the monthly term. In addition, we note that the dependence between Bitcoin and commodity as well as oil, and silver decrease the most within their respective medium return quantiles over the short term. Furthermore, we document a one-way causality running from each of the financial assets considered to Bitcoin in different quantiles of the return distribution. In sum, our findings support the notion that Bitcoin can provide financial diversification in certain return quantiles (i.e., bear, normal, or bull asset conditions) and time frequencies (i.e., short, medium, or long term investment horizon).     

Generalized DEA model of fundamental analysis and its application to portfolio optimization

Fundamental analysis is used in asset selection for equity portfolio management. In this paper, a generalized data envelopment analysis (DEA) model is developed to analyze a firm’s financial statements over time in order to determine a relative financial strength indicator (RFSI) that is predictive of firm’s stock price returns. RFSI is based on maximizing the correlation between the DEA-based score of financial strength and the stock market performance. This maximization involves a difficult binary nonlinear program that requires iterative re-configuration of parameters of financial statements as inputs and outputs. We utilize a two-step heuristic algorithm that combines random sampling and local search optimization. The proposed approach is tested with 230 firms from various US technology-industries to determine optimized RFSI indicators for stock selection. Then, those selected stocks are used within portfolio optimization models to demonstrate the usefulness of the scheme for portfolio risk management.     

Convergence to isoelastic utility and policy in multiperiod portfolio choice

This paper considers the problem of the investor who has numerous opportunities for revising his portfolio and whose choices are governed by a utility function defined on ‘terminal’ wealth, U₀(x₀). Attention is focussed on the behavior of the induced utility functions of intermediate wealth with n periods to go, U_n(x_n), and the associated investment policies. Conditions under which the functions U_n(x_n) will tend to isoelasticity have previously been given by Mossin and by Leland. In this paper, the conditions for convergence are weakened further, to the point where they appear sufficiently broad to encompass perhaps most utility functions of practical interest.     

Replicating portfolio approach to capital calculation

The replicating portfolio (RP) approach to the calculation of capital for life insurance portfolios is an industry standard. The RP is obtained from projecting the terminal loss of discounted asset–liability cash flows on a set of factors generated by a family of financial instruments that can be efficiently simulated. We provide the mathematical foundations and a novel dynamic and path-dependent RP approach for real-world and risk-neutral sampling. We show that our RP approach yields asymptotically consistent capital estimators if the chaotic representation property holds. We illustrate the tractability of the RP approach by three numerical examples.     

The determinants of portfolio investment in offshore financial centers

An offshore financial center (OFC) is generally defined as a jurisdiction in which the financial sector is disproportionately larger than the domestic economy. We examine what national level push factors determine a country's investment in OFCs using a panel data set covering 78 source countries investing in over 200 foreign jurisdictions. OFCs are defined using an existing method based on institutional characteristics and fiscal policies as well as with a novel data-driven method based on actual financial positions relative to GDP. We find that OFC investment is driven by various aspects of low profitability in the source country. Source country factors such as inefficient labor markets, weak infrastructure, and competitive markets drive investments toward OFCs. These factors have an even larger impact on OFC investment than corporate tax rates in the source country. This suggests that a country seeking to reduce utilization of OFC's should focus on policies like improving domestic infrastructure and the efficiency of labor markets.     

The numéraire portfolio in semimartingale financial models

We study the existence of the numéraire portfolio under predictable convex constraints in a general semimartingale model of a financial market. The numéraire portfolio generates a wealth process, with respect to which the relative wealth processes of all other portfolios are supermartingales. Necessary and sufficient conditions for the existence of the numéraire portfolio are obtained in terms of the triplet of predictable characteristics of the asset price process. This characterization is then used to obtain further necessary and sufficient conditions, in terms of a no-free-lunch-type notion. In particular, the full strength of the “No Free Lunch with Vanishing Risk” (NFLVR) condition is not needed, only the weaker “No Unbounded Profit with Bounded Risk” (NUPBR) condition that involves the boundedness in probability of the terminal values of wealth processes. We show that this notion is the minimal a-priori assumption required in order to proceed with utility optimization. The fact that it is expressed entirely in terms of predictable characteristics makes it easy to check, something that the stronger NFLVR condition lacks.      

The effect of estimation risk on optimal portfolio choice

This paper determines the effect of estimation risk on optimal portfolio choice under uncertainty. In most realistic problems, the parameters of return distributions are unknown and are estimated using available economic data. Traditional analysis neglects estimation risk by treating the estimated parameters as if they were the true parameters to determine the optimal choice under uncertainty. We show that for normally distributed returns and ‘non-informative’ or ‘invariant’ priors, the admissible set of portfolios taking the estimation uncertainty into account is identical to that given by traditional analysis. However, as a result of estimation risk, the optimal portfolio choice differs from that obtained by traditional analysis. For other plausible priors, the admissible set, and consequently the optimal choice, is shown to differ from that in traditional analysis.     

Human capital investment and optimal portfolio choice

We analyze how an individual should optimally invest in human capital when he also has financial wealth. We treat the individual's possibilities to take more education as expansion options and apply real option analysis. In addition, we characterize the individual's optimal consumption strategy and portfolio weights. The individual has a demand for hedging financial risk, labor income risk, and also wage level risk.     

A simple nonparametric approach to low-dimension,shortfall-based portfolio selection

This paper develops a simple, low-dimension portfolio selection rule based on minimizing the probability of realizing a return below some pre-determined benchmark or target rate. Unlike most shortfall-based methods, which employ approximations to the shortfall probability, this method operates directly on the complementary Heaviside function representation of the in-sample shortfall probability. Thus, no behavioral assumptions, other than the notion of shortfall minimization, enter the portfolio selection process.     

The impacts of racial differences on demand for financial assets

The purpose of this study is to examine the impacts of racial differences on the demand for financial assets by individuals. Differences in the demand for financial assets by various racial groups would have important implications not only for monetary policies but also for aggregate studies based on the representative agent model. According to the Gorman form of commodity demand, the validity of the representative model is critically dependent on the assumption that marginal propensities to hold financial assets are constant across individuals regardless of their socio-economic characteristics. Findings in this study indicate that the elasticity of wealth, marginal propensities, and the elasticity of user cost vary substantially among Whites and African Americans.