Mean Reversion in the United Kingdom Stock Market and its Implications for a Profitable Trading Strategy

Following Fama and French (1988), we examine the mean reverting behavior of the United Kingdom stock market total returns over the period 1919 through 1990. Evidence of statistically significant mean reversion is only found during the pre-war subperiod. A contrarian investment strategy, however, does not enhance performance over a naive buy and hold investment strategy. Further, an application of Richardson and Stock's (1989) alternative asymptotic distribution theory suggests that the mean reversion detected during the pre-war period may reflect the poor finite sample approximation of traditional fixed overlap asymptotic distribution theory.     

Property Company Stock Price and Net Asset Value: A Mean Reversion Perspective

This study investigates the relationship between property company stock prices (P) and their net asset values (NAV) from a mean reversion perspective. In contrast to U.K. evidence, we find that there is absence of a long-term stable relationship between the two series. However, the variance ratio tests and multi-period regressions suggest that both P and NAV series have exhibited transitory components. In addition, there is some evidence of mean reversion behavior of Singapore property stock prices toward the property companies' NAVs over the past 15 years from 1985 to 1999, both at individual company level and in the sector as a whole. The results also reveal that NAV, as a traditional proxy to fundamental value, is significant in capturing the dynamics of the changes in property stock prices. Hence NAV is relevant in property company valuation. However the extent of mean reversion between the property stock prices and NAVs is slow and deviations between the two markets' valuation could therefore be prolonged.     

Mean Reversion in the Short Horizon Returns of UK Portfolios

This paper will show that short horizon stock returns for UK portfolios are more predictable than suggested by sample autocorrelation co-efficients. Four capitalisation based portfolios are constructed for the period 1976–1991. It is shown that the first order autocorrelation coefficient of monthly returns can explain no more than 10% of the variation in monthly portfolio returns. Monthly autocorrelation coefficients assume that each weekly return of the previous month contains the same amount of information. However, this will not be the case if short horizon returns contain predictable components which dissipate rapidly. In this case, the return of the most recent week would say a lot more about the future monthly portfolio return than other weeks. This suggests that when predicting future monthly portfolio returns more weight should be given to the most recent weeks of the previous month, because, the most recent weekly returns provide the most information about the subsequent months' performance. We construct a model which exploits the mean reverting characteristics of monthly portfolio returns. Using this model we forecast future monthly portfolio returns. When compared to forecasts that utilise the autocorrelation statistic the model which exploits the mean reverting characteristics of monthlyportfolio returns can forecast future returns better than the autocorrelation statistic, both in and out of sample.     

The demand for eurozone stocks and bonds in a time-varying asset allocation framework

This paper analyzes the short and long-run demand for traditional financial asset classes in eleven founding eurozone members. Our sample period starts from the introduction of euro till 2017. We calculate the welfare losses stemming from ignoring the demand for domestic and eurozone equities and bonds, for various levels of risk aversion. Our results show that the bonds of eurozone countries are, in general, desirable for short-run only. However, in Ireland, Portugal and Spain the bonds are desirable for both short-run and long-run investment horizons. Stocks exhibit both short-run and long-run desirability for all countries except Greece. The Greek stocks are desirable for short- run only.     

Dynamic Portfolio Selection: the Relevance of Switching Regimes and Investment Horizon

This paper investigates the questions of dynamic portfolio selection and intertemporal hedging within a Markovian regime‐switching framework. The investment opportunity set is spanned by a well‐diversified home‐market portfolio and the risk‐free asset. Our results highlight the economic importance of regimes, as optimal portfolio weights are clearly dependent on the prevailing regime. We present evidence that the question of intertemporal hedging is a more complex issue than is hinted in the previous literature, since demand for intertemporal hedging is present in some regimes, but not in others. Finally, our main findings are qualitatively unchanged across the four largest stock markets in the world.     

Risk diversification gains from metropolitan housing assets

The study analyzes the roles of metropolitan housing assets in risk diversification by assessing intertemporal hedging demands for multi‐asset portfolios, which include metropolitan houses, REITs, stocks, bonds, and riskless assets. Investors substitute housing assets in high‐population MSAs with those in low‐population cities, and they switch their holdings of housing assets to less risky bonds in the 2007–2008 housing bust. The findings from the multi‐period portfolio choice problem provide evidence for momentum reversal since forward‐looking investors substitute bottom metropolitan housing assets for top ones in the housing boom, and the GTTB index and the lagged REIT price return have negative impacts on various asset returns.     

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.     

The Optimal Construction of Internationally Diversified Equity Portfolios Hedged Against Exchange Rate Uncertainty

Much of the empirical work on hedging exchange rate exposure in portfolios of financial assets has used a unitary hedge ratio, or a currency overlay. Alternatively, the currencies themselves can be treated as assets and the position in them optimized. This study empirically tests whether the ex post results of recent studies, which conclude that currencies should themselves be optimized, stand up under parameter uncertainty. It may very well be that ex ante, when parameter inputs must be estimated from historical data, the attempt to determine the optimal currency weights results in inferior performance in comparison to using a simple unitary hedging strategy, or even unhedged international investment. The results suggest that a local currency return unitary hedging strategy works best in the presence of parameter uncertainty.     

居民最优消费与投资组合 ——基于不完全市场的分析

运用动态最优控制理论与随机金融分析方法,研究由劳动收入的特质风险与借贷约束导致的非完全市场对消费者最优投资和消费策略、波动及福利损失的影响,得到相应的动态最优投资和消费策略.研究发现:非完全市场会显著抑制消费者的消费动机和投资动机,并加剧消费波动和投资波动.此外,财务困境下非完全市场会对消费者造成高达40％ 的福利损失.     

The Effect of Information Quality on Optimal Portfolio Choice

Three types of agents acting on different information sets are considered: fully informed agents, insiders, and outsiders. Differences in information quality are shown to affect the properties of their optimal portfolios. For an outsider, the share of wealth invested in the stock is decreasing in the variance of the stock. However, for an insider, the effect of an increasing stock variance on the optimal portfolio weight is ambiguous. In a calibration to U.S. data, the confidence intervals of the insider's demand for the stock converge, whereas the outsider's confidence intervals become wider.     

Optimal Number of Stock Holdings in Mutual Fund Portfolios Based on Market Performance

Among the decisions that most mutual fund portfolio managers make is the number of stocks to hold. We posit that there is an optimal number of stocks for each mutual fund, reflecting the trade‐off between diversification benefits versus transactions and monitoring costs. We find a significant quadratic relation between number of stock holdings and risk‐adjusted returns for U.S. equity mutual fund portfolios during 1992–2000. Moreover, we find that changes in the number of stocks held over time are more highly correlated with mutual fund flows than with funds' investment returns.     

股票市场投资者结构国际比较研究

本文梳理了A股市场与相关国家(地区)股市投资者结构的现状,探讨这些市场投资者结构的演变路径、以及促成这种演变的主要因素。基于境外主要市场投资者结构演变及政策措施的经验教训,本文提出改进A股市场相关制度的六点政策建议:第一,从更宏观的政策层面入手,改进上市公司结构,增厚上市公司利润,以增进A股市场的长期投资价值;第二,着力培育和鼓励大体量资金机构进入股市;第三,有必要继续扩大海外合格机构投资者资金规模;第四,完善金融产品供应,适当放宽交易规则约束,使机构投资者有更多工具和交易方式参与市场交易;第五,在个人投资者方面,监管部门需要适度转变监管理念,进而改进相关交易规则,鼓励个人投资者以合理方式理性参与股市;第六,创新税收激励机制,合理引导个人投资者。     

Tactical Asset Allocation and Stock Issuance in the Korean Stock Market

Stock issuance predicts future stock returns in the Korean market. This creates profitable trading opportunities. Abnormal returns exist in the zero-cost portfolio that short the firms issuing large numbers of shares and longs those issuing small numbers of shares. Their average abnormal return is 12 percent per annum, which is highly significant even after controlling for market, size, value, and momentum factors as well as transaction costs. The authors suggest the possibility of fixed costs in equity market timing. Only the sizable benefit from market timing over fixed costs motivates firms to increase net equity shares.     

Mean reversion and the forecasting of country betas: a note

In 1971 and 1975, M. E. Blume found individual equity betas to have a “regression” tendency toward the grand mean of unity. His original results have been widely accepted to the extent that a literature has developed on the application of Bayesian techniques to beta estimation so as to adjust for mean reversion. The more recent literature has focused on risk estimation and the applicability of asset pricing models in the international finance setting, where the focus has been on the aggregate country level risk. Given the increasing popularity of country beta models, an interesting but, as yet, unexplored issue is whether aggregate country betas display mean reversion tendencies similar to that found for individual company betas. The examination of this issue is the central aim of the current paper. In short, this analysis reveals strong evidence of mean reversion of country betas, similar to that documented in the single country setting in the existing literature.     

股票价格均值回归理论研究综述

随机漫步理论认为股票的价格是不能预测的,许多实证检验的结果也支持了这一结论。但是,近年来均值回归理论对随机漫步理论提出了挑战。从长期来看,股票价格呈均值回归是必然的;均值回归具有不对称性;政府行为对股票的均值回归具有一定的影响。     

The Optimal Pricing Policy of a Monopolistic Marketmaker in the Equity Market

This paper presents a stochastic optimization model for marketmaking in security markets with a single dealer. Buy and sell orders are assumed to arrive at rates that are functions of the ask and bid prices. The dealer incurs both proportional and fixed transaction costs as well as portfolio costs. Methods of dynamic programming and semi-Markov Decision Processes are used to characterize optimal pricing policies and to perform sensitivity analysis. Both bid and ask prices are nonincreasing functions of the dealer's inventory. Spread is unrelated to inventory position but positively related to order size. Computational examples demonstrate various results.     

Institutional Investor Trading in a Short Investment Horizon: Evidence from the Korean Stock Market

We examine the weekly trading activities of institutional investors in the Korean stock market. First, we find that average net trades by institutional investors this week are negatively related to one-week lagged returns, suggesting that they could be contrarian traders. Second, our finding shows that institutional investors’ net trades this week are positively related to the net trades next week, consistent with persistent trading and/or herding behavior. Third, we find that institutional net trades are positively related to the post one-week returns. Finally, our findings are most pronounced in the group of short-term institutional investors.     

投资者关注与分析师评级漂移——来自中国股票市场的证据

本文使用一个直接源自于投资者行为的新颖变量——财经互动社区的超额发帖量——作为投资者关注的代理变量,发现投资者关注可以用来解释分析师评级的漂移现象,即针对分析师评级变动,股价的立即反应随着投资者关注的增加而增强,股价的漂移随着投资者关注的增加而减弱,同时发现投资者关注对股票交易量具有显著正向的作用。