estimation methods in portfolio selection and the effectiveness of short sales restrictions uk evidence forecasting the mean returns vector and the covariance matrix is a key feature in implementing portfolio theory the performance of the bayes stein method for forecasting these parameters for use in the markowitz model with and without short sales was compared with that of seven other estimation methods and three alternative portfolio selection techniques this paper represents the first large scale empirical investigation of the usefulness of the bayes stein approach using historical data this data was drawn from the london stock exchange in contrast to earlier studies the relative performance of bayes stein was mixed while it produced reasonable estimates of the mean returns vector there were superior methods e g overall mean for estimating the covariance matrix when short sales were permitted when short sales were prohibited actual portfolio performance was clearly improved although there was little to choose between the various estimation methods

more on estimation risk and simple rules for optimal portfolio selection for the risk averse investor consideration of estimation risk is important in selecting an expected utility maximizing portfolio it has previously been shown that the composition of the tangency portfolio is unaffected by the recognition of estimation risk if the full covariance model is used alternatively if the market model is used the composition of the tangency portfolio has been shown to be affected by the recognition of estimation risk however as is demonstrated in this paper the effect will generally not be as substantive as previously believed and in many situations can be safely ignored in order to determine the composition and location of an efficient frontier from which an optimal portfolio will be selected the investor must employ estimates of expected returns variances and covariances for the set of securities under consideration if the investor simply treats the estimated parameter values for the securities as true parameter values then estimation risk will have been ignored and as shown by barry 1 and klein and bawa 14 15 a suboptimal portfolio will most likely have been selected bawa brown and klein 6 and klein and bawa 14 discuss the effects of estimation risk on the selection of an optimal portfolio from a set of risky assets and note that the location but not the composition of the efficient frontier changes when estimation risk is recognized if security returns are generated by a stationary multivariate normal distribution for which the investor has a diffuse prior furthermore brown 8 has shown these results to be robust for severe misspecification of the underlying multivariate distribution of returns e g assuming it to be normal when in actuality it is student t with small degrees of freedom this paper is concerned with the effects of estimation risk on the composition of the tangency portfolio derived from a set of risky assets and a risk free asset under the assumption that the investor has a diffuse prior 1 barry 2 bawa and brown 4 and brown 7 have shown analytically that the composition of the tangency portfolio is unaffected by estimation risk if the full covariance model is used chen and brown 10 have expanded upon the work of brown 9 and have argued that if security returns are generated by the market model then the composition of the tangency portfolio will be substantively different when estimation risk is recognized

portfolio selection using hierarchical bayesian analysis and mcmc methods abstract this paper contributes to portfolio selection methodology using a bayesian forecast of the distribution of returns by stochastic approximation new hierarchical priors on the mean vector and covariance matrix of returns are derived and implemented comparison s between this approach and other bayesian methods are studied with simulations on 25 years of historical data on global stock indices it is demonstrated that a fully hierarchical bayes procedure produces promising results warranting more study we carried out a numerical optimization procedure to maximize expected utility using the mcmc monte carlo markov chain samples from the posterior predictive distribution this model resulted in an extra 1 5 percentage points per year in additional portfolio performance on top of the hierarchical bayes model to estimate and and use the markowitz model which is quite a significant empirical result this approach applies to a large class of utility functions and models for market returns

capture by threat we analyze a simple stochastic environment in which policy makers can be threatened by nasty interest groups in the absence of these groups the policy maker s desire for reelection guarantees that good policies are implemented for every realization of the shock when pressure groups can harass the policy maker good policies will be chosen for only a subset of states of nature hence honest and able leaders might implement bad policies and needed reforms could be delayed in order to make good policies more likely the public will want to increase the cost of exerting pressure for nasty groups and provide rents to those in power this last result can be used to explain the existence of political parties they play a role resembling that of the supervisor in the literature on collusion in hierarchical agency a rational public may also choose to ignore negative media reports on a politician s personal life and in general elect strong political leaders the prevalence of coercive methods of infl

naive versus optimal diversification tail risk and performance it is well documented in portfolio optimization that naive diversification outperforms optimal mean variance diversification because the latter is subject to severe estimation error our study provides an alternative explanation for the outperformance of naive diversification by examining the tail risk of naive diversification relative to optimal mean variance diversification we utilize a rolling sample approach and compare the out of sample performance and tail risk of various optimal strategies to that of the naive diversification strategy using portfolios consisting of individual stocks we show that for portfolios containing relatively small number of stocks naive diversification outperforms optimal mean variance diversification and is less exposed to tail risk however for relatively large number of stocks in the portfolio naive diversification maintains its superior performance but increases tail risk and results in more concave portfolio returns these results imply that the outperformance of naive diversification acts as compensation for the increase in tail risk and concavity

de facto political power and institutional persistence much of the empirical work and the conceptual discussion of the impact of institutions on economic development either implicitly or explicitly assumes that institutions persist although acemoglu et al 2001 provide evidence that constraints on the executive persist many aspects of institutions change frequently less developed countries cycle between democracy and dictatorship and often change their constitutions relatedly while the current economic problems in latin america are often traced back to colonial times stanley l engerman and kenneth l sokoloff 1997 acemoglu et al 2002 the specific institutions that once underpinned the colonial economy such as the encomienda the mita or slavery vanished long ago these observations suggest that we need to develop a framework in which changes in certain dimensions of institutions are consistent with overall institutional persistence in this paper we make an attempt to highlight some important mechanisms for understanding simultaneous change and persistence in institutions institutional persistence in this context refers to the persistence of a cluster of economic institutions such as the extent of enforcement of property rights for a broad cross section of society acemoglu et al 2001 such lack of property rights enforcement may be driven by quite different specific institutions e g risk of expropriation entry barriers or economic systems such as serfdom or slavery in turn these different specific economic institutions may exist under different political institutions including dictatorships absolutist monarchies oligarchies and corrupt or even populist democracies given this rich array of possibilities a useful framework must specify which aspects of institutions can change which others have a tendency to persist in equilibrium and how the persistence of certain types of institutions could have lasting effects on economic outcomes in this paper we provide a simple model of the coexistence of change and persistence in institutions first we describe some existing approaches to the persistence of social arrangements as well as the essence of the mechanism we propose next we illustrate the key issues using the experience of the southern united states and last we provide a simple model that formalizes the main mechanism in the paper we conclude by discussing a complementary mechanism to the one presented in this paper

inequality democracy and the protection of property rights motivated by the observed relevance of institutional quality such as strong property rights for economic performance this research considers the emergence of property rights protection as a political outcome it argues that the support for such protection is greater the more equal income distribution and the smaller political bias when these conditions initially hold the politically influential rich elite may prefer to relinquish its power through democratisation in order to commit future policy makers to the enforcement of property rights thus ensuring larger investment and faster growth along the transition path in a very unequal economy however such democratisation will not take place

estimating the correlation structure of international share prices recently the case for international portfolio diversification has been convincingly argued in the framework of mean variance portfolio analysis by a number of researchers however virtually no empirical documentation exists concerning the best method for estimating the correlation structure of international share prices in this paper 12 models for estimating the international correlation matrix are presented and empirically tested relative to full historical extrapolation the major evaluation criteria are the mean squared error and stochastic dominance based on the frequency distribution of the squared forecast errors the results indicate that the national mean model strictly dominates all the others in terms of forecasting accuracy in the last fifteen years or so a number of researchers have convincingly argued the case for international portfolio diversification as opposed to purely domestic diversification in the framework of mean variance portfolio analysis see e g grubel 4 levy and sarnat 8 solnik 12 mcdonald 10 lessard 6 and subrahmanyam 15 1 in spite of the emerging consensus in the academic and investment communities that investors can benefit from international diversification in terms of a more efficient risk return tradeoff virtually no empirical documentation exists concerning the best method for estimating the correlation structure of international share prices since estimating this correlation structure is a necessary precondition for being able to apply modern portfolio theory to international investments empirical examination is of major importance moreover only through empirical examination of the correlation structure will the effort to devise a simple algorithm that can be used to solve for the optimal international portfolio be facilitated in order to trace out the set of ex ante efficient international porffolios using the tenets of modern portfolio theory the investor must obtain accurate estimates of the expected return and the variance of return for each domestic and foreign security and he must also obtain accurate estimates of the correlation coefficients of the returns between each pair of securities stated in terms of his numeraire

massaging mean variance inputs returns from alternative global investment strategies in the 1980s this paper explores the impact of adjustments to the inputs on total returns terminal wealth and portfolio turnover in an unconstrained monthly mean variance mv asset allocation over time it is well known that mv allocations are very sensitive to small forecast errors in the means and covariances this sensitivity is especially pronounced for errors in means one way to control this sensitivity to forecast errors is to use stein estimation we examined three naive applications of stein estimation for six individual country stock indexes five country bond indexes and five cash indexes this study has two major conclusions first any of the suggested adjustments to inputs dominate the results of an unadjusted input mv optimization adjusted input portfolios have higher mean return less variance and greater terminal wealth than unadjusted input portfolios second these improvements become even greater with transaction costs

unequal societies income distribution and the social contract this paper develops a theory of inequality and the social contract aiming to explain how countries with similar economic and political fundamentals can sustain such different systems of social insurance fiscal redistribution and education finance as those of the united states and western europe with imperfect credit and insurance markets some redistributive policies can improve ex ante welfare and this implies that their political support tends to decrease with inequality conversely with credit constraints lower redistribution translates into more persistent inequality hence the potential for multiple steady states with mutually reinforcing high inequality and low redistribution or vice versa

a dynamic globally diversified index neutral synthetic asset allocation strategy an investor with the ability to assess the prospective return and risk structure of the global capital markets can construct portfolios that over time will not only outperform actively or passively managed domestic asset portfolios but will also outperform passively managed global portfolios a bayesian approach to dynamic seemingly unrelated regression dsur is a robust and effective means to forecast the one step ahead conditional distribution of asset returns this approach recognizes the time varying nature of the global capital markets the predictive moments are used to derive a single factor return model once an index portfolio is specified the index portfolio represents an investor s underlying portfolio given the factor model that assesses the relative attractiveness and risk of the assets in relation to the index an index neutral portfolio is constructed as an overlay to enhance the returns of the index portfolio this portfolio is mean variance optimal is notional neutral i e the sum of the asset exposures is zero and has returns that are designed to be uncorrelated with the returns of the index portfolio the implementation of such an index neutral portfolio using derivative securities is simulated over the period january 1988 to december 1993

bayes stein estimation for portfolio analysis in portfolio analysis uncertainty about parameter values leads to suboptimal portfolio choices the resulting loss in the investor s utility is a function of the particular estimator chosen for expected returns so this is a problem of simultaneous estimation of normal means under a well specified loss function in this situation as stein has shown the clas sical sample mean is inadmissible this paper presents a simple empirical bayes estimator that should outperform the sample mean in the context of a portfolio simulation analysis shows that these bayes stein estimators provide significant gains in portfolio selection problems

institutional traps and economic growth this article s point of departure is that low quality institutions concentration of political power and material wealth and underdevelopment are persistent over time its analytical model views an equal distribution of political power as a commitment device to enhance institutional quality thereby promoting growth the politically powerful coalition contemplates relinquishing of its power through democratization weighing this advantageous consequence against the limit on own appropriative ability that it entails the possibility of two developmental paths is exhibited with concentration of political and economic power low quality institutions and slow growth and a more equal distribution of political and economic resources high quality institutions and faster growth

bayesian estimation of the global minimum variance portfolio in this paper we consider the estimation of the weights of optimal portfolios from the bayesian point of view under the assumption that the conditional distribution of the logarithmic returns is normal using the standard priors for the mean vector and the covariance matrix we derive the posterior distributions for the weights of the global minimum variance portfolio moreover we reparameterize the model to allow informative andnon informative priors directly for the weights of the global minimum variance portfolio the posterior distributions of the portfolio weights are derived in explicit form for almost all models the models are compared by using the coverage probabilities of credible intervals in an empirical study we analyze the posterior densities of the weights of an international portfolio

the intertemporal substitution model of labour market fluctuations an empirical analysis the paper uses two approaches to study whether aggregate fluctuations in employment and unemployment may be explained within a market clearing framework as intertemporal substitution in labour supply first log linear equations for labour supply and unemployment are estimated using a forecasting model to measure wage and price expectations second a utility function is used to derive and estimate an equation for labour supply as a function of the current real wage and consumption the influence of expected future real wages and interest rates is captured by the consumption variable the empirical results do not support the intertemporal substitution model

das human kapital a theory of the demise of the class structure this paper suggests that the demise of the capitalists workers class structure was a socio economic transformation orchestrated by the capitalists in reaction to the increasing importance of human capital in sustaining their profit rates physical capital accumulation in the process of industrialization enhanced the importance of human capital in production and generated incentives for capitalists to support the provision of public education for the masses triggering the demise of the existing class structure the implications of the theory are consistent with the voting patterns on england s education reform of 1902

historical legacies a model linking africa s past to its current underdevelopment abstract recent studies have found evidence linking africa s current under development to colonial rule and the slave trade given that these events ended long ago why do they continue to matter today i develop a model exhibiting path dependence which provides one explanation for why these past events may have lasting impacts the model has multiple equilibria one equilibrium with secure property rights and a high level of production and others with insecure property rights and low levels of production i show that external extraction when severe enough causes a society initially in the high production equilibrium to move to a low production equilibrium because of the stability of low production equilibria the society remains trapped in this suboptimal equilibrium even after the period of external extraction ends the model provides one explanation why africa s past events continue to matter today

bayesian inference for comparative research rv egression analysis in comparative research suffers from two distinct problems of statistical inference first because the data constitute all the available observations from a population conventional inference based on the long run behavior of a repeatable data mechanism is not appropriate second the small and collinear data sets of comparative research yield imprecise estimates of the effects of explanatory variables we describe a bayesian approach to statistical inference that provides a unified solution to these two problems this approach is illustrated in a comparative analysis of unionization a widely used tool in quantitative comparative politics is the linear regression model estimating relationships between institutional and economic variables observed for a set of countries constituting some population of interest a brief survey of recent comparative research finds no shortage of work of this type for instance remmer 1991 identifies economic crisis as a source of electoral volatility in latin american countries in the 1980s robertson 1990 presents evidence that institutions moderating the transaction costs of negotiations between capital and labor reduce industrial conflict and golden 1993 finds that union wage moderation in industrialized democracies results from coordinated collective bargaining although the methodological advantages are well documented jackman 1985 we identify two distinct problems of statistical inference endemic to this type of quantitative comparative research first because the data constitute all the available observations from a population conventional inference based on the long run behavior of some repeatable data mechanism is not appropriate second because data sets tend to be small and collinear the effects of explanatory variables are estimated imprecisely in most applications the first problem is generally ignored and the second is solved by imposing restrictions on the regression model to obtain sensible results the bayesian model of statistical inference provides a unified solution to these two distinct problems of quantitative comparative research two features of bayesian inference are important in this context first probability is conceived subjectively as characterizing a researcher s uncertainty about the parameters of a statistical model this subjective probability concept seems particularly useful in comparative settings where the data are typically convenience samples not generated by a known probability mechanism such as random sampling second bayesian inference allows the inclusion of other information in addition to the quantitative sample information again this seems useful in the comparative context where rich historical material is commonly available sparking ideas for researchers but formally discarded in the final analysis in the bayesian approach this historical material can be formally incorporated into the analysis we begin by detailing why the nonstochastic and weak data typical of comparative research are problematic for conventional linear regression analysis we next introduce some ideas about bayesian inference and describe bayesian regression analysis these ideas are applied to a comparative analysis of unionization the subject of a recent exchange in the american political science review between michael wallerstein and john stephens stephens and wallerstein 1991 wallerstein 1989 the bayesian regressions we present are supplemented with a sensitivity analysis that investigates how our conclusions depend upon the sample data and our prior beliefs although we survey some ideas in bayesian statistics a full introduction to the bayesian approach to statistical inference is beyond our scope here good book length treatments are pollard 1986 lee 1989 and at a slightly higher level press 1989 our intention here is to spotlight problematic but ignored issues of statistical inference in a common area of application the bayesian alternative that we present represents just one way forward to address these inferential problems

corruption and the costs of redistribution micro evidence from indonesia this paper examines the degree to which the corruption in developing countries may impair the ability of governments to redistribute wealth among their citizens specifically i examine a large antipoverty program in indonesia that distributed subsidized rice to poor households i estimate the extent of corruption in the program by comparing administrative data on the amount of rice distributed with survey data on the amount actually received by households the central estimates suggest that on average at least 18 of the rice appears to have disappeared ethnically heterogeneous and sparsely populated areas are more likely to be missing rice using conservative assumptions for the marginal cost of public funds i estimate that the welfare losses from this corruption may have been large enough to offset the potential welfare gains from the redistributive intent of the program these findings suggest that corruption may impose substantial limitations on developing countries redistributive efforts and may help explain the low level of transfer programs in developing countries d 2005 elsevier b v all rights reserved

performance of portfolios optimized with estimation error we explain the poor out of sample performance of mean variance optimized portfolios developing theoretical bias adjustments for estimation risk by asymptotically expanding future returns of portfolios formed with estimated weights we provide closed form non bayesian adjustments of classical estimates of portfolio mean and standard deviation the adjustments significantly reduce bias in international equity portfolios increase economic gains and are robust to sample size and to nonnormality dominant terms grow linearly with the number of assets and decline inversely with the number of past time periods under suitable conditions sharpe ratio maximizing tangency portfolios become more diversified using these approximation methods it may be possible to assess before investing the effect of statistical estimation error on portfolio performance

protesting and justifying a latent class model for contingent valuation with attitudinal data this article develops a latent class model for estimating willingness to pay wtp for public goods using simultaneously contingent valuation cv and attitudinal data to identify individuals with similar characteristics such as wtp and protest attitudes we find evidence that the answer to the cv question influences the responses to the attitudinal questions in our case this influence reflects rational behavior budget constraint issues and justification biases related to protest reasons such as lack of trust in institutions or fairness issues with respect to the distribution of the burden of preservation the results from our empirical application confirm the importance of accounting for those biases

dynamic stability and reform of political institutions abstract this paper examines endogenous institutional change in a class of dynamic political games the political aggregation rules used at date t 1 are instrumental choices under rules at date t effectively rules are players who can strategically delegate future policy making authority to different rules a political rule is stable if it selects itself a reform occurs when an alternative rule is selected the stability of a political rule is shown to depend on whether its choices are dynamically consistent for instance simple majority rules can be shown to be dynamically consistent in many common environments where wealth weighted voting rules are not the result extends to political rules that incorporate private activities such as extra legal protests threats or private investment the approach is one way of understanding various explanations of institutional change proposed in the literature a parametric model of public goods provision gives an illustration

60 years of portfolio optimization practical challenges and current trends abstract the concepts of portfolio optimization and diversification have been instrumental in the development and understanding of financial markets and financial decision making in light of the 60 year anniversary of harry markowitz s paper portfolio selection we review some of the approaches developed to address the challenges encountered when using portfolio optimization in practice including the inclusion of transaction costs portfolio management constraints and the sensitivity to the estimates of expected returns and covariances in addition we selectively highlight some of the new trends and developments in the area such as diversification methods risk parity portfolios the mixing of different sources of alpha and practical multi period portfolio optimization

a portfolio approach to estimating the average correlation coefficient for the constant correlation model this paper presents a portfolio approach to estimating the average correlation coefficient of a group of stocks which are considered for portfolio analysis the average correlation coefficient has been shown to produce a better estimate of the future correlation matrix than individual pairwise correlations the advantage of the approach described here is that it does not require the estimation of pairwise correlations for estimating their average a major obstacle to the implementation of markowitz s 1952 mean variance portfolio selection model is the difficulty in estimating the required inputs particularly troublesome are the pairwise correlations among all stocks which are being considered for inclusion in a portfolio the sheer number of required correlation estimates makes it highly impractical to examine a large number of stocks sharpe s 1963 single index model sim was developed in response to this problem it assumes correlations with a common index to be the only source of covariation among stock returns the necessary number of estimations is much reduced since only the correlations with the index need be considered accumulated empirical evidence suggests that the sim is misspecified bernard 1987 provides evidence of significant intra industry cross sectional correlations in contemporaneous market model residuals this evidence implies that correlations with a common index will not capture the total covariation among stock returns an alternative simple structure is the constant correlation model ccm which uses the historical average correlation coefficient for the future in two related articles elton and gruber 1973 and elton gruber and urich 1978 have shown that despite its simplicity the ccm produces better forecasts of the future correlation matrix than those obtained from the sim or the full historical correlation matrix the superior performance of the ccm should make it an attractive alternative to the sim although simple portfolio selection procedures have been developed for the ccm by elton gruber and padberg 1976 1977a b the computational problem will still be large if the full correlation matrix needs to be estimated to compute the average correlation we present below a simplified but exact method of estimating the average correlation coefficient which can be applied

do constraints improve portfolio performance the discrete time dynamic investment model using only historical data in various asset allocation settings often produces significant abnormal returns however the model does not choose the diversified portfolios that theory suggests it should therefore in this paper we compare the investment policies and returns of the model with and without constraints on the mix of risky assets the constraints lead to appreciably more diversification and less realized risk but only at the cost of less realized return visual comparisons of compound return standard deviation plots and statistical comparisons of jensen s alpha suggest that the reduction in return is not worth the reduction in risk for more risk averse investors ex post utility and certainty equivalent returns suggest that it is the results however illustrate the problems associated with using ex post utility to measure performance 2000 elsevier science b v all rights reserved

estimation risk and simple rules for optimal portfolio selection elton gruber and padberg egp 6 7 have recently simplified the process of constructing optimal portfolios by developing simple criteria for optimal portfolio selection which do not involve use of mathematical programming their simple decision rules permit one to determine easily which securities to include in an optimal portfolio and how much to invest in each however in practical applications of theoretical models sample estimators are usually treated as if they were true values of unknown parameters as a result the effect of the standard errors of sample estimators on decision rules are completely ignored bawa brown and klein 1 have shown that what is optimal in the absence of estimation risk is not necessarily optimal or even approximately optimal in the presence of estimation risk moreover brown 4 examined optimal portfolio choice under uncertainty for various portfolio selection procedures the diffuse bayes rule the markowitz certainty equivalent ce rule the aggregation ce rule and the equal weight rule 1 and found that the diffuse bayes rule uniformly dominates the markowitz ce rule in repeated samples for the quadratic utility case as the sample size increases the bayes rule becomes superior to the aggregation ce and the equal weight rules in addition the result holds even where the probability distribution of returns is seriously misspecified thus brown s 4 study has clearly indicated that without taking estimation risk into account portfolio selection rules other than the bayes rule can lead investors to select suboptimal portfolios this paper shows by using the single index model for the return generating process that the simple decision rules for optimal portfolio selection derived by elton gruber and padberg 7 are not identical under the bayesian and the traditional methods of analysis 2 moreover in the case where short sales are not

bayesian and capm estimators of the means implications for portfolio selection abstract this paper compares active investment policies under three alternative models for estimating expected stock returns the historical sample mean a shrinkage or bayesian estimator and a capm based estimator the out of sample performance of actively managed u s industry portfolios is analyzed for these three estimators over the period 1931 to 1987 it is found that the classical method based on historical means and covariances leads to the worst forecasts and out of sample performance and is generally outperformed by shrinkage estimators an active portfolio with expected returns based on the capm produced the best results among all actively managed portfolios this strategy as we show closely matches a simple buy and hold the market rule

the world distribution of income falling poverty and convergence period we estimate the world distribution of income by integrating individual income distributions for 138 countries between 1970 and 2000 country distributions are constructed by combining national accounts gdp per capita to anchor the mean with survey data to pin down the dispersion poverty rates and head counts are reported for four specific poverty lines rates in 2000 were between one third and one half of what they were in 1970 for all four lines there were between 250 and 500 million fewer poor in 2000 than in 1970 we estimate eight indexes of income inequality implied by our world distribution of income all of them show reductions in global inequality during the 1980s and 1990s

bayesian inference methods for univariate and multivariate garch models a survey this survey reviews the existing literature on the most relevant bayesian inference methods for univariate and multivariate garch models the advantages and drawbacks of each procedure are outlined as well as the advantages of the bayesian approach versus classical procedures the paper makes emphasis on recent bayesian non parametric approaches for garch models that avoid imposing arbitrary parametric distributional assumptions these novel approaches implicitly assume infinite mixture of gaussian distributions on the standardized returns which have been shown to be more flexible and describe better the uncertainty about future volatilities finally the survey presents an illustration using real data to show the flexibility and usefulness of the non parametric approach

history lessons institutions factor endowments and paths of development in the new world the explanations offered for the contrasting records of long run growth and development among the societies of north and south america most often focus on institutions the traditional explanations for the sources of these differences in institutions typically highlight the significance of national heritage or religion we in contrast argue that a hemispheric perspective across the wide range of colonies established in the new world by the europeans suggests that although there were many influences factor endowments or initial conditions had profound and enduring effects on the long run paths of institutional and economic development followed by the respective economies

hedge fund portfolio construction a comparison of static and dynamic approaches abstract this article studies the impact of modeling time varying covariances correlations of hedge fund returns in terms of hedge fund portfolio construction and risk measurement we use a variety of static and dynamic covariance correlation prediction models and compare the optimized portfolios out of sample performance we find that dynamic covariance correlation models construct portfolios with lower risk and higher out of sample risk adjusted realized return the tail risk of the constructed portfolios is also lower using a mean conditional value at risk framework we show that dynamic covariance correlation models are also successful in constructing portfolios with minimum tail risk

in defense of optimization the fallacy of 1 n previous research has shown that equally weighted portfolios outperform optimized portfolios which suggests that optimization adds no value in the absence of informed inputs this article argues the opposite with naive inputs optimized portfolios usually outperform equally weighted portfolios the ostensible superiority of the 1 n approach arises not from limitations in optimization but rather from reliance on rolling short term samples for estimating expected returns this approach often yields implausible expectations by relying on longer term samples for estimating expected returns or even naively contrived yet plausible assumptions optimized portfolios outperform equally weighted portfolios out of sample

aggregate supply and demand factors in oecd unemployment an update unemployment in the oecd countries has continued to rise to unprecedented levels the eec countries which on average ended the turbulent 1970s with an unemployment rate of close to 7 per cent are now in the mid 1980s approaching an 11 per cent level the united states is virtually the only country for which the changes in unemployment during the 1970s have not been systematically upward and for which the 1984 rate was more or less back to where it had been both ten years and five years earlier see figure 1 the reasons for the sustained increase in unemployment during the 1970s as well as the possible reasons for differences in patterns across industrial countries have been studied but question marks undoubtedly remain our own emphasis in an earlier study has been on the combination of the great supply shocks of the previous decade and the contractionary macro policy response of most oecd countries to these shocks as well as on the more recent policy coordination problem between the united states and europe with a few more years that have elapsed and quite a few percentage points of additional unemployment there is obviously room for both an update and a reappraisal starting from a fairly conventional aggregate supply as and aggregate demand ad macro framework an increase in unemployment may come

inequality does cause underdevelopment insights from a new instrument consistent with the provocative hypothesis of engerman and sokoloff 1997 2000 this paper confirms with cross country data that agricultural endowments predict inequality and inequality predicts development the use of agricultural endowments specifically the abundance of land suitable for growing wheat relative to that suitable for growing sugarcane as an instrument for inequality is this paper s approach to problems of measurement and endogeneity of inequality the paper finds inequality also affects other development outcomes institutions and schooling which the literature has emphasized as mechanisms by which higher inequality lowers per capita income it tests the inequality hypothesis for development institutional quality and schooling against other recent hypotheses in the literature while finding some evidence consistent with other development fundamentals the paper finds high inequality to independently be a large and statistically significant barrier to prosperity good quality institutions and high schooling

ranking of investment funds acceptability versus robustness abstract within the class of performance ratios the sharpe measure can lead to misleading evaluation and various modifications have been investigated as a starting point we consider the axiomatic approach based on the notion of acceptable index of performance our goal is to show how the promising properties possessed by alternative measures such as the gain loss ratio or the average value at risk ratio are not compatible with the statistical robustness of their estimated counterparts this clearly affects the ranking of funds and consequently the performance persistence we study the qualitative robustness along with the quantitative resistance of the corresponding estimators in a nonparametric setting we include the value at risk ratio which is not an acceptability index of performance these measures do not possess qualitative robustness nonetheless we show how some degree of resistance to data contamination restricted to bounded intervals can be recovered using the relationship between the influence function of estimators and their bias for large samples we suggest the average value at risk ratio and the value at risk ratio as the less sensitive to outliers as a consequence acceptability is no longer a prerequisite for performance evaluation to limit the alteration of a given ranking among alternative investment funds one can use the not acceptable value at risk ratio as well eventually we propose a modified ratio either of the trimmed mean or of the median to the value at risk

local capture evidence from a central government transfer program in uganda according to official statistics 20 percent of uganda s total public expenditure was spent on education in the mid 1990s most of it on primary education one of the large public programs was a capitation grant to cover schools nonwage expenditures using panel data from a unique survey of primary schools we assess the extent to which the grant actually reached the intended end user schools the survey data reveal that during 1991 1995 the schools on average received only 13 percent of the grants most schools received nothing the bulk of the school grant was captured by local officials and politicians the data also reveal considerable variation in grants received across schools suggesting that rather than being passive recipients of flows from the government schools use their bargaining power to secure greater shares of funding we find that schools in better off communities managed to claim a higher share of their entitlements as a result actual education spending in contrast to budget allocations is regressive similar surveys in other african countries confirm that uganda is not a special case

the injustice of inequality in many countries the operation of legal political and regulatory institutions is subverted by the wealthy and the politically powerful for their own benefit this subversion takes the form of corruption intimidation and other forms of influence we present a model of such institutional subversion focusing specifically on courts and of the effects of inequality in economic and political resources on the magnitude of subversion we then use the model to analyze the consequences of institutional subversion for the law and order environment in the country as well as for capital accumulation and growth we illustrate the model with historical evidence from gilded age united states and the transition economies of the 1990s we also present some cross country evidence consistent with the basic prediction of the model

comparison of alternative utility functions in portfolio selection problems this paper examines the effect of alternative utility functions and parameter values on the optimal composition of a risky investment portfolio normally distributed assets are the setting for the theoretical and empirical analyses the results agree well with the available theory and imply utility functions and parameter values that are appropriate for investors with particular risk bearing attitudes the results give strong empirical support to the proposition that utility functions having different functional forms and parameter values but similar absolute risk aversion indices have similar optimal portfolios these results suggest that over horizons up to one year one can safely substitute convenient surrogate utility functions for other utility functions for reasons of tractability or otherwise the results also provide guidance regarding the significance of the magnitude and change of particular numerical values of the risk aversion index moreover theoretical exact results are obtained using rubinstein s measure of global risk aversion

a rational explanation for home country bias abstract while modern portfolio theory predicts that investors should diversify across international markets corporate equity is essentially held by domestic investors french and poterba 1991 french k poterba j 1991 investor diversification and international equity markets american economic review 81 222 226 suggest that in order for this bias to be justified investors must hold optimistic expectations about their domestic markets and pessimistic expectations about their foreign markets tesar and werner 1995 tesar l l werner i m 1995 home bias and high turnover journal of international money and finance 14 467 492 find existing explanations for the home equity bias unsatisfactory and conclude that the issue poses a challenge for portfolio theory we develop a model that incorporates both the foregone gains from diversification and the informational constraints of international investing and shows that home equity bias is consistent with rational mean variance portfolio choice specifically we prove that the nature of estimation risk in international markets can be responsible for this phenomenon we show that when the cross market variability in the estimation errors of international markets means far exceeds the cross market variability in the means themselves domestic dedication dominates international diversification an examination of 11 international markets returns over the last 25 years from the perspective of german japanese and us investors provides evidence consistent with this explanation

performance of currency portfolios chosen by a bayesian technique 1967 1985 abstract this paper is about normative currency portfolio rules it assumes logarithmic investors who maximize the expected utility from lognormal currency returns with and without short sales restrictions a number of implementable portfolio diversification policies are tried out on a large body of data covering nine major currencies and eighteen years of weekly observations in doing so we present ways of dealing with the estimation risk in an international context the necessary mean and covariance inputs are provided by a bayesian prior on the means and by sample means and covariance matrices which are estimated from weekly sample data while some policies do produce abnormal returns over and beyond proper reward for risk none does so in a statistically significant way this means that the evidence does not allow one to conclude that market participants are improperly diversified as a byproduct of this investigation techniques are found which would allow portfolio managers to earn a proper reward for risk by following a purely mechanical procedure such techniques may be valuable in a multi country world where the aggregate portfolio of currencies and securities is unknown and is not supposed to be efficient

a bayesian perspective on inference from macroeconomic data bayesian methods are logical admissible linguistically natural helpeful conceptually simple and honest but they are also preposterous and very labor intensive generalized bayesian methods allow data to be confusing and inconclusive a bayesian viewpoint allows one to get a handle on the conundrums of exploratory data analysis which are prevalent when the theory is vague and experiments are expensive these ideas are illustrated with a bayesian analysis of the determinants of the u s unemployment rate using four different priors as inputs

international portfolio diversification with estimation risk international portfolio diversification has long been advocated as a way of enhancing average returns while reducing portfolio risk for the investor who considers diversifying into foreign securities this proposition however relies on the assumption that the required inputs to the classical mean variance analysis are known with certainty typically expected returns variances and covariances are simply replaced by their ex post sample values and the optimal portfolio is derived without mentioning the uncertainty inherent in these parameter values but the rational investor should take this uncertainty into account when forming expectations and probably will consider estimators that are less subject to estimation error than the classical sample mean this paper investigates alternative estimators of expected returns and their implications for the alleged gains from diversification an important observation is the crucial influence that errors in estimating expected returns have on portfolio analysis a closer examiprevious studies of international portfolio diversification have relied on ex post meanvariance analysis without considering the problem of estimation risk typically past averages are substituted for expected returns and no allowance is made for the uncertainty inherent in these parameter values first i demonstrate the shortcomings of such an approach and second i investigate another method of estimating expected returns initially proposed by stein by shrinking the sample averages toward a common mean i find that the out of sample performance of the optimal portfolio is substantially increased one of the implications of this method is that the classical conclusions vastly overestimate the possible gains in average returns instead benefits from diversification are more likely to accrue from a reduction in risk this paper draws on part of my dissertation at the university of chicago i am grateful to arnold zellner michael mussa george constantinides and especially john bilson for useful discussions and comments numerous improvements were also suggested by the referee this research received the generous financial support of the college interuniversitaire d etudes doctorales dans les sciences du management

combining equilibrium resampling and analyst s views in portfolio optimization abstract this paper proposes the use of a portfolio optimization methodology which combines features of equilibrium models and investor s views as in black and litterman 1992 and also deals with estimation risk as in michaud 1998 in this way our combined methodology is able to meet the needs of practitioners for stable and diversified portfolio allocations while it is theoretically grounded on an equilibrium framework we empirically test the methodology using a comprehensive sample of developed countries fixed income and equity indices as well as sub samples stratified by geographical region time period asset class and risk level in general our proposed combined methodology generates very competitive portfolios when compared to other methodologies considering three evaluation dimensions financial efficiency diversification and allocation stability by generating financially efficient stable and diversified portfolio allocations our methodology is suitable for long term investors such as central banks and sovereign wealth funds

inequality and institutions abstract this paper presents theory and evidence on the relationship between inequality and institutional quality we exhibit a model in which the two may dynamically reinforce each other and set to test this relationship with a broad array of institutional measures the double causality between institutional strength and a more equal distribution of income is empirically established using dynamic panel and linear feedback analysis

portfolios in the ibex 35 before and after the global financial crisis abstractin this article we present an analysis of the effectiveness of various portfolio optimization strategies applied to the stocks included in the spanish ibex 35 index for a period of 14 years from 2001 until 2014 the period under study includes episodes of volatility and instability in financial markets incorporating the global financial crisis and the european sovereign debt crisis this implies a challenge in portfolio optimization strategies since the methodologies are restricted to the assignment of positive weights we have taken for asset allocation the daily returns with an estimation window equal to 1 year and we hold portfolio assets for another year this article attempts to influence the discussion over whether the naive diversification proves to be an effective strategy as opposed to portfolio optimization models for that we evaluate the out of sample performance of 15 strategies for asset allocation in the ibex 35 before and after of the global financial crisis our results sugg

income and democracy existing studies establish a strong cross country correlation between income and democracy but do not control for factors that simultaneously affect both variables we show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and vari ous measures of democracy we present instrumental variables estimates that also show no causal effect of income on democracy the cross country corre lation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years this pattern is con sistent with the idea that societies embarked on divergent political economic development paths at certain critical junctures jel d7 e 1

explaining international and intertemporal variations in income inequality this paper explores the propositions that income inequality is relatively stable within countries and that it varies significantly among countries a new and expanded data set provides broad support for both propositions drawing on a political economy and capital market imperfection arguments to explain the intertemporal and international variation in inequality the empirical analysis shows that the predicted variables associated with the first argument a measure of civil liberties and the initial level of secondary schooling and the second argument a measure of financial depth and the initial distribution of land are indeed important determinants of inequality this paper explores two propositions regarding income inequality they are first income inequality is relatively stable within countries and second it varies significantly across countries to illustrate note that the gini coefficient in india remained almost constant for forty years 1951 92 with mean 32 6 and standard deviation 2 0 2 in contrast the variation in gini coefficients across countries is large 61 9 in honduras in 1968 compared with 17 8 in bulgaria in 1976 if substantiated these propositions have potentially significant implications for poverty the significance of the first is obvious barring any fundamental socio political change poverty reduction will depend crucially on the rate of economic growth given this the significance of the second is that in inegalitarian economies the poor will enjoy a smaller share of any national increment in income than in more egalitarian ones drawing on a new and expanded data set on inequality deininger and squire 1996a the first of the paper s three sections conducts standard statistical tests of the two propositions the sample comprises 573 observations on the most common measure of inequality the gini coefficient for 49 developed and developing countries covering the period 1947 94 the results broadly confirm our two propositions specifically analysis of variance anova shows that about 90 of the total variance in the gini coefficients

bayesian asset allocation and u s domestic bias u s investors hold much less international stock than is optimal according to mean variance portfolio theory applied to historical data we investigated whether this home bias can be explained by bayesian approaches to international asset allocation in comparison with mean variance analysis bayesian approaches use different techniques for obtaining the set of expected returns by shrinking the sample means toward a reference point that is inferred from economic theory applying the bayesian approaches to the field of international diversification we found that a substantial home bias can be explained when a u s investor has a strong belief in the global mean variance efficiency of the u s market portfolio and in this article we show how to quantify the strength of this belief we also found that one of the bayesian approaches leads to the same implications for asset allocation as the mean variance tracking error criterion in both cases the optimal portfolio is a combination of the u s market por

the dynamic black litterman approach to asset allocation abstract we generalize the black litterman bl portfolio management framework to incorporate time variation in the conditional distribution of returns in the asset allocation process we evaluate the performance of the dynamic bl model using both standard performance ratios as well as other measures that are designed to capture tail risk in the presence of non normally distributed asset returns we find that the dynamic bl model outperforms a range of different benchmarks moreover we show that the choice of volatility model has a considerable impact on the performance of the dynamic bl model

a bayesian approach to modeling stock return volatility for option valuation new measures of stock return volatility are developed to increase the precision of stock option price estimates with bayesian statistical methods volatility estimates for a given stock are developed using prior information on the cross sectional patterns in return volatil ities for groups of stocks sorted on size financial leverage and trading volume call option values computed with the bayesian procedure generally improve prediction accuracy for market prices of call options relative to those computed using implied volatility standard historical volatility or even the actual ex post volatility that occurred during each option s life although the bayesian methods produce biased call price estimators they do reduce the systematic tendency of standard pricing approaches to overprice underprice options on high low volatility stocks little bias improvement is observed with respect to the time to maturity and moneyness of the call options