Maximizing an equity portfolio excess growth rate: a new form of smart beta strategy?

It has been claimed that, for dynamic investment strategies, the simple act of rebalancing a portfolio can be a source of additional performance, sometimes referred to as the volatility pumping effect or the diversification bonus because volatility and diversification turn out to be key drivers of the portfolio performance. Stochastic portfolio theory suggests that the portfolio excess growth rate, defined as the difference between the portfolio expected growth rate and the weighted-average expected growth rate of the assets in the portfolio, is an important component of this additional performance (see Fernholz [Stochastic Portfolio Theory, 2002 (Springer)]). In this context, one might wonder whether maximizing a portfolio excess growth rate would lead to an improvement in the portfolio performance or risk-adjusted performance. This paper provides a thorough empirical analysis of the maximization of an equity portfolio excess growth rate in a portfolio construction context for individual stocks. In out-of-sample empirical tests conducted on individual stocks from 4 different regions (US, UK, Eurozone and Japan), we find that portfolios that maximize the excess growth rate are characterized by a strong negative exposure to the low volatility factor and a higher than 1 exposure to the market factor, implying that such portfolios are attractive alternatives to competing smart portfolios in markets where the low volatility anomaly does not hold (e.g. in the UK, or in rising interest rate scenarios) or in bull market environments.     

Optimal investment decisions when time-horizon is uncertain

Many investors do not know with certainty when their portfolio will be liquidated. Should their portfolio selection be influenced by the uncertainty of exit time? In order to answer this question, we consider a suitable extension of the familiar optimal investment problem of Merton [Merton, R.C., 1971. Optimal consumption and portfolio rules in a continuous-time model. Journal of Economic Theory 3, 373–413], where we allow the conditional distribution function of an agent’s time-horizon to be stochastic and correlated to returns on risky securities. In contrast to existing literature, which has focused on an independent time-horizon, we show that the portfolio decision is affected.     

Empowerment of Social Norms on Water Consumption

Environmental and Resource Economics - This study develops a model of water extraction using endogenous social norms. Many users are connected by a unique shared resource that can become scarce in...     

Is there an optimistic bias on betting markets?

Bettors are subject to an optimistic bias when betting on the team they support. This paper shows that this individual bias does not affect betting odds on British teams in association football (soccer), as it is often argued.     

Macro and Micro Perspectives of Growth and Poverty in Africa

This article reviews trends in poverty, economic policies, andgrowth in a sample of African countries during the 1990s, drawingon the better household data now available. Experiences havevaried. Some countries have seen sharp drops in income poverty,whereas others have witnessed marked increases. In some countriesoverall economic growth has been pro-poor and in others not.But the aggregate numbers hide systematic distributional effects.Taking both macro and micro perspectives of growth and povertyin Africa, the article draws four key conclusions. First, economicpolicy reforms (improving macroeconomic balances and liberalizingmarkets) appear conducive to reducing poverty. Second, marketconnectedness is crucial to enable participation in the gainsfrom economic growth. Some regions and households by virtueof their remoteness were left behind when growth picked up.Third, education and access to land emerge as key private endowmentsto help households benefit from new economic opportunities.Finally, rainfall variations and ill health have profound effectson poverty outcomes, underscoring the significance of socialrisk management in poverty reduction strategies in Africa.     

Stadiums and Scheduling: Measuring Deadweight Losses in the Victorian Football League, 1920–70

Over a 50 year period, Australian Rules football's major league, the Victorian Football League, did not always use its largest and best-equipped stadium for regular season games between its most popular teams or schedule those teams to play twice in a regular season. We calculate deadweight losses from the use of capital goods (stadiums) and effects of match scheduling in this professional sports league. Such analysis has not been attempted previously because of the absence of a counterfactual. The welfare losses were significant but not sufficient to threaten the survival of a distance-protected cartel.