omega performance measure and portfolio insurance abstract we analyze the performance of the two main portfolio insurance methods the obpi and cppi strategies using downside risk measures for this purpose we introduce kappa performance measures and especially the omega measure these measures take account of the entire return distribution we show that the cppi method performs better than the obpi as a by product we determine the set of threshold values for these risk reward performance measures

information flow and pricing errors a unified approach to estimation and testing this study examines whether rates of information flow differ between trading and nontrading periods and whether the variances of pricing errors differ at the open and close of trading the approach improves on existing methods by allowing for correlation between pricing errors and information flow and by conducting inferences at the individual security level the daytime rate of information flow is about seven times the overnight rate and the variances of pricing errors at the open are not different from those at the close of trading this evidence differs from existing results based on return variance ratios much of the empirical market microstructure literature predicates its analysis on a model in which price changes have a permanent information related component and a transitory market friction or dealer cost component two questions that have received a great deal of attention relate to the behavior of these components the first is whether and to what extent the rate of information flow into prices differs during trading and nontrading periods this is equivalent to asking whether the variance of the permanent component per unit time is different during periods when trading occurs than when trading does not occur the second question is whether pricing errors of differing magnitudes are associated with different trading mechanisms or trading preceded by an overnight period of nontrading this corresponds to asking whether the variance of the transitory component is different depending on which trading mechanism is used or whether trading has been halted for a time more generally these questions relate to whether the permanent and transitory components of price changes are heteroskedastic although both questions share the context of this model existing studies typically focus

dynamic allocations for currency futures under switching regimes signals abstract over the last decades speculative investors in the fx market have profited in the well known currency carry trade strategy ct however during currencies or global financial crashes ct produces substantial losses in this work we present a methodology that enhances ct performance significantly for our final strategy constructed backtests show that the mean semivolatility ratio can be more than doubled with respect to benchmark ct to do the latter we first identify and classify ct returns according to their behavior in different regimes using a hidden markov model hmm the model helps to determine when to open and close positions depending whether the regime is favorable to ct or not finally we employ a mean semivariance allocation model to improve allocations when positions are opened

the speculative efficiency hypothesis the hypothesis that forward prices are the best unbiased forecast of future spot prices is often presented in the economic and financial analysis of futures markets this paper considers the hypothesis independently of its implications for rational expectations or market efficiency and in order to stress this fact the term speculative efficiency is used to characterize the state envisaged under the hypothesis if a market is subject to efficient speculation the supply of speculative funds is infinitely elastic at the forward price that is equal to the expected future spot price the expected future spot price is a market price determined as the solution to the underlying rational expectations macroeconomic model although the paper is primarily concerned with testing this hypothesis in the foreign exchange market the methodology introduced in the paper is of general application to all futures markets this abstract was borrowed from another version of this item

trading mechanisms and stock returns an empirical investigation this paper examines the effects of the mechanism by which securities are traded on their price behavior we compare the behavior of open to open and close to close returns on nyse stocks given the differences in execution methods applied in the opening and closing transactions opening returns are found to exhibit greater dispersion greater deviations from normality and a more negative and significant autocorrelation pattern than closing returns we study the effects of the bid ask spread and the price adjustment process on the estimated return variances and covariances and discuss the associated biases we conclude that the trading mechanism has a significant effect on stock price behavior

mean var portfolio optimization a nonparametric approach portfolio optimization involves the optimal assignment of limited capital to different available financial assets to achieve a reasonable trade off between profit and risk we consider an alternative markowitz s mean variance model in which the variance is replaced with an industry standard risk measure value at risk var in order to better assess market risk exposure associated with financial and commodity asset price fluctuations realistic portfolio optimization in the mean var framework is a challenging problem since optimizing var leads to a non convex np hard problem which is computationally intractable in this work an efficient learning guided hybrid multi objective evolutionary algorithm mode gl is proposed to solve mean var portfolio optimization problems with real world constraints such as cardinality quantity pre assignment round lot and class constraints a learning guided solution generation strategy is incorporated into the multi objective optimization process to promote efficient convergence by guiding the evolutionary search towards promising regions of the search space the proposed algorithm is compared against the non dominated sorting genetic algorithm nsga ii and the strength pareto evolutionary algorithm spea2 experimental results using historical daily financial market data from s p 100 and s p 500 indices are presented experimental results shows that mode gl outperforms two existing techniques for this important class of portfolio investment problems in terms of solution quality and computational time the results highlight that the proposed algorithm is able to solve the complex portfolio optimization without simplifications while obtaining good solutions in reasonable time and has significant potential for use in practice

the collected papers of richard a musgrave a review article richard musgrave is the doyen of public finance economists his written work has affected virtually every branch of the subject it is important not only in its own right but also on account of where it has led others to follow the theory of public finance 1959 is a landmark in the field unlikely ever to be surpassed in breadth of coverage or depth of scholarship his teaching has influenced many generations of students at michigan johns hopkins princeton and harvard and his active participation in professional activities both inside and outside universities has been an example to us all the publication of his collected papers in public finance in a democratic society is therefore very much to be welcomed the two volumes reviewed here reprint articles and contributions to books spanning the period from his voluntary exchange theory of public economy in 1938 to the a brief review of fiscal doctrine which appeared in the first volume of the handbook of public economics in 1985 the 800 pages represent only a fraction of musgrave s total writings which he estimates at some 10 000 pages i 90 but the collection provides an excellent overall view of his contribution to public finance the first volume deals with fiscal functions and social goals taxation and macro economic aspects of fiscal policy the second volume covers fiscal federalism social security development finance and fiscal doctrine it need hardly be said that such a broad canvas cannot be adequately covered in this article and my review selects a small number of topics for discussion

variance ratio statistics and high frequency data testing for changes in intraday volatility patterns variance ratio tests are routinely employed to assess the variation in return volatility over time and across markets however such tests are not statistically robust and can be seriously misleading within a high frequency context we develop improved inference procedures using a fourier flexible form regression framework the practical significance is illustrated through tests for changes in the fx intraday volatility pattern following the removal of trading restrictions in tokyo contrary to earlier evidence we find no discernible changes outside of the tokyo lunch period we ascribe the difference to the fragile finite sample inference of conventional variance ratio procedures and a single outlier

econometrics of financial models and market microstructure effects this paper addresses the problem of testing financial models in the presence of market microstructure effects the moment restrictions implied by the financial and market microstructure models are jointly tested using hansen s 1982 gmm approach to illustrate the methodology i consider the random walk model in combination with the bid ask price effect model of blume and stambaugh 1983 within this sufficiently simple framework i obtain closed form expressions for the estimators standard errors of the estimators and the test statistic which affords an opportunity to examine the precision of the estimators and the power of the test as the return interval increases i show that apparent rejections of the random walk model cannot be sustained when tests of the model are adjusted for market microstructure effects and i discuss other applications of the methodology

the central banker as a risk manager estimating the federal reserve s preferences under greenspan we derive a natural generalization of the taylor rule that links changes in the interest rate to the balance of the risks implied by the dual objective of sustainable economic growth and price stability this monetary policy rule reconciles economic models of expected utility maximization with the risk management approach to central banking within this framework we formally test and reject the standard assumption of quadratic and symmetric preferences in inflation and output that underlies the derivation of the taylor rule our results suggest that fed policy decisions under greenspan were better described in terms of the fed weighing upside and downside risks to their objectives rather than simply responding to the conditional mean of inflation and of the output gap

carry trade the gains of diversification market participants routinely take advantage of the failure of uncovered interest rate parity to speculate in currency markets perhaps the most widely used currency speculation strategy is the carry trade in this article we take the perspective of an individual currency trader and document the gains to diversifying the carry trade across different currencies we show that these gains are large diversification boosts the typical sharpe ratio by over 50

the carry trade and fundamentals nothing to fear but feer itself the carry trade is the investment strategy of going long in high yield target currencies and short in low yield funding currencies recently this nave trade has seen very high returns for long periods followed by large crash losses after large depreciations of the target currencies based on low sharpe ratios and negative skew these trades could appear unattractive even when diversied across many currencies but more sophisticated conditional trading strategies exhibit more favorable payos we apply novel within economics binary outcome classication tests to show that our directional trading forecasts are informa tive and out of sample loss function analysis to examine trading performance the critical conditioning variable we argue is the fundamental equilibrium exchange rate feer expected returns are lower all else equal when the target currency is overvalued like traders researchers should incorporate this information when evaluating trading strategies when we do so some questions are resolved negative skewness is purged and market volatility vix is uncorrelated with returns other puzzles remain the more sophisticated strategy has a very high sharpe ratio suggesting market ineciency

a portfolio performance index fund managers may sensibly be averse to earning a time averaged portfolio return that is less than the average return of some designated benchmark when a portfolio is expected to earn a higher average return than the benchmark return the probability that it will not approaches zero asymptotically at a computable exponential decay rate the probability decay rate is thus proposed here as a new portfolio performance index in the widely analyzed special case in which returns are normally distributed the new performance index maximizing portfolio is the same as the popular sharpe ratio maximizing portfolio the results of the two approaches generally differ however because of nonnormal levels of skewness and or kurtosis in the portfolio attributable to large asymmetrical economic shocks or investments in options and other derivative securities an illustrative example will show that the new index is easy to implement and consistent with empirical evidence on portfolio choice favors investments with

manufacturer s return policy in a two stage supply chain with two risk averse retailers and random demand abstract this paper studies the manufacturer s return policy and the retailers decisions in a supply chain consisting of one manufacturer and two risk averse retailers under a single period setting with price sensitive random demand we characterize each retailer s risk embedded objective via conditional value at risk and construct manufacturer stackelberg games with and without horizontal price competition between the retailers we explore through numerical studies the effects of the retailers aversion to risk and other parameters on the manufacturer s return policy and profit and the retailers decisions we further investigate the effect of distribution asymmetry by comparing the results with normal and lognormal demand

forecasting the performance of hedge fund styles this article predicts the relative performance of hedge fund investment styles using time varying conditional stochastic dominance tests these tests allow for the construction of dynamic trading strategies based on nonparametric density forecasts of hedge fund returns during the recent financial turmoil our tests predict a superior performance for the global macro investment style compared with the other strategies of directional traders the dedicated short bias investment style is stochastically dominated by the other directional styles these results are confirmed by simple nonparametric tests constructed from realized excess returns further by utilizing a cross validation method for optimal bandwidth parameter selection we discover the factors that have predictive power regarding the density of hedge fund returns we observe that different factors have forecasting power for different regions of the returns distribution and more importantly that the fung and hsieh factors have power not only for describing the risk premium but also if appropriately exploited for density forecasting

dynamic asset allocation for varied financial markets under regime switching framework asset allocation among diverse financial markets is essential for investors especially under situations such as the financial crisis of 2008 portfolio optimization is the most developed method to examine the optimal decision for asset allocation we employ the hidden markov model to identify regimes in varied financial markets a regime switching model gives multiple distributions and this information can convert the static mean variance model into an optimization problem under uncertainty which is the case for unobservable market regimes we construct a stochastic program to optimize portfolios under the regime switching framework and use scenario generation to mathematically formulate the optimization problem in addition we build a simple example for a pension fund and examine the behavior of the optimal solution over time by using a rolling horizon simulation we conclude that the regime information helps portfolios avoid risk during left tail events

stock market structure and volatility the procedure for opening stocks on the nyse appears to affect price volatility an analytical framework for assessing the magnitude of the structurally induced volatility is presented the ratio of variance of open to open returns to closeto close returns is shown to be consistently greater than one for nyse common stocks during the period 1982 through 1986 tbe greater volatility at the open is not attributable to the way in which public information is released since both the opento open return and the close to close return span the same period of time instead the greater volatility appears to be attributable to private information revealed in trading and to temporaryprice deviations induced by specialist and other traders the implied cost of immediacy at the open is significantly higher than at the close other empirical evidence in this article documents the volume of trading at the open the time delays between the exchange opening and the first transaction in a stock the difference in daytime volatility versus overnight volatility and the extent to which volatility is related to trading volume

an investigation of transactions data for nyse stocks using transactions data the behavior of returns and characteristics of trades at the micro level is examined a minute by minute market return series is formed and tested for normality and autocorrelation evidence of differences in return distributions is found among overnight trades trades during the first 30 minutes following the market opening trades at the close and trades during the remainder of the day the latter distribution is found to be normal unusually high returns and standard deviations of returns are found at the beginning and the end of the trading day when the beginningand end of the day effects are omitted autocorrelation in the market return series is reduced substantially a number of patterns in trading are reported this paper empirically investigates the nature of the return generating process and the characteristics of trade size price changes trading frequency and trading interval at the level of individual trades for a large sample of nyse stocks previous studies of market indices have used daily weekly or monthly

agency theory and stochastic dominance recently agency theory has become popular as a means of explaining the structure of contracts between various classes of economic agents oftentimes the contracts of interest represent sharing rules for the payoffs that result from some production activity in the usual two party model of the contracting problem one party designated the principal delegates authority for decisions affecting production to another party designated the agent typically the assumptions made about the consequences of the agent s actions are that they are associated with effort on the part of the agent for which the agent but not the principal has disutility and that greater effort will result in higher payoffs from production in every state of nature moral hazard is then introduced by assuming that the principal is unable to observe the agent s effort or to infer what effort the agent applied through an ex post observation of the payoff that results

third degree stochastic dominance here f x and g x are less than cumulative probability distributionis where x is a continuous or discrete random variable representing the outcome of a prospect the closed interval a b is the sample space of both prospects the integral shown in rule 2 and those shown throughout the paper are stieltjes integrals recall that the stieltjes integral fb f x dg x exists if one of the functions f and g is continuous and the other has finite variation in a b let d1 d2 and d3 be three sets of utility functions x d1 is the set containing all utility functions with 4 x and 1 x continuous and 41 x 0 for all xe a b d2 is the set with x 1 x 2 x continuous and q j x 0 02 x o for all xc a b d3 is the set with x 1 x 2 x 3 x continuous and 1 x 04 2 x o o for all xc a b here 1 x denotes the ith derivative of x hadar and russell proved that rule 1 is valid for all cd1 and rutle 2 is valid for all ed2 the authors point out that the set of probability distributions that can be ordered by means of second degree stochastic dominance is in general larger than that which can be ordered by means of first degree stochastic dominance note that in rule 2 they assume that x is not only an increasing function of x but also exhibits weak global risk aversion a condition guaranteed by requiring the second derivative of x to be nonpositive in this paper a condition which will be called third degree stochastic dominance is considered it is based on the following assumption about the form of the utility function x from a normative point of view one expects the risk premium associated with an uncertain prospect to become smaller the greater is the individual s wealth the plausibility and implications of this assumption h ave been explored by john pratt as well as others the risk premium of an uncertain prospect is that amount by which the certainty equivalent of the prospect differs from its expected value in mathematical terms given the prospect f x with expected value a the corresponding risk premium t is obtained by solving the following equation rb

stochastic network programming for financial planning problems several financial planning problems are posed as dynamic generalized network models with stochastic parameters examples include asset allocation for portfolio selection international cash management and programmed trading arbitrage despite the large size of the resulting stochastic programs the network structure can be exploited within the solution strategy giving rise to efficient implementations empirical results are presented indicating the benefits of the stochastic network approach for the asset allocation case

numerical approximations of optimal portfolios in mispriced asymmetric levy markets abstract we present numerical approximations of optimal portfolios in mispriced levy markets under asymmetric information for informed and uninformed investors having logarithmic preference we apply our numerical scheme to kou 2002 jump diffusion markets by deriving analytic formulas for the first two derivatives of the underlying portfolio objective function which depend only on the levy measure of the jump generating process optimal portfolios are then simulated using the box muller algorithm newton s method and incomplete beta functions convergence dynamics and trajectories of sample paths of optimal portfolios for both investors are presented at different levels of information asymmetry mispricing horizon asymmetry in the kou density jump intensity volatility mean reversion speed and sharpe ratios we also apply the proposed newton s algorithm to compute optimal portfolios for investors in variance gamma markets via instantaneous centralized moments of returns

an analysis of factors affecting price volatility of the us oil market abstract this paper studies the price volatility of the crude oil market by examining the market structure of opec the stable and unstable demand structure and related elasticity of demand in particular the impacts of prosperity and recession of the world economy and the resulting demand shift on crude oil price are investigated the error correction model is used to estimate the demand relations and related elasticity the income effect on demand functions is evaluated to shed light on future prices a simulation of potential oil prices under different scenarios on a cut of one million barrels per day by opec is evaluated from our simulation given the 4 cut in opec production the oil price is expected to increase unless the recession is severe the magnitude and scope of a price hike would be diminished if non opec or domestic production were greatly expanded

scenario generation and stochastic programming models for asset liability management in this paper we develop and test scenario generation methods for asset liability management models we propose a multi stage stochastic programming model for a dutch pension fund both randomly sampled event trees and event trees fitting the mean and the covariance of the return distribution are used for generating the coefficients of the stochastic program in order to investigate the performance of the model and the scenario generation procedures we conduct rolling horizon simulations the average cost and the risk of the stochastic programming policy are compared to the results of a simple fixed mix model we compare the average switching behavior of the optimal investment policies our results show that the performance of the multi stage stochastic program could be improved drastically by choosing an appropriate scenario generation method

a markov model of heteroskedasticity risk and learning in the stock market abstract we examine a variety of models in which the variance of a portfolio s excess return depends on a state variable generated by a first order markov process a model in which the state is known to economic agents is estimated it suggests that the mean excess return moves inversely with the level of risk we then estimate a model in which agents are uncertain of the state the estimates indicate that agents are consistently surprised by high variance periods so there is a negative correlation between movements in volatility and in excess returns

conditioning carry trades less risk more return abstract prior studies show that extreme interest rate differentials irds and high foreign exchange rate fx volatility have substantial explanatory power for the validity of uip we show that these contemporaneous drivers also have predictive power by implementing a conditional currency carry trade ct strategy that excludes regimes for which uip is likely to hold conditioning high fx volatility only or on both fx volatility and extreme irds outperforms the base case unconditional ct strategy in virtually any of the settings analyzed conditioning on very large irds only shows mixed findings our strategy works best for smaller ct portfolios

dynamic speculation and hedging in commodity futures markets with a stochastic convenience yield the main objective of this paper is to address in an a continuous time framework the issue of using storable commodity futures as vehicles for hedging purposes when in particular the convenience yield as well as the market prices of risk evolve randomly over time following the martingale route and by operating a suitable constant relative risk aversion utility function crra specific change of numeraire we solve the investor s dynamic optimization program to obtain quasi analytical solutions for optimal demands which can be expressed in terms of two discount bonds traded and synthetic contrary to the existing literature we explicitly derive the individual optimal proportions invested in the spot commodity in a discount bond and in the futures contracts which can be computed in a simple recursive way we suggest various decompositions allowing an investor to assess the sensitivity of the optimal demands to the state variables and to specify the role played by each risky asset empirical evidence shows that the convenience yield has a strong impact on the speculation and hedging positions and the interaction among time varying risk premia determines the magnitude and the sign of these positions

a stochastic programming model for money management abstract portfolio managers in the new fixed income securities have to cope with various forms of uncertainty in addition to the usual interest rate changes uncertainy in the timing and amount of cashflows changes in the default and other risk premia and so on complicate the portfolio manager s problem we develop here a multi period dynamic portfolio optimization model to address this problem the model specifies a sequence of investment decisions over time that maximize the expected utility of return at the end of the planning horizon the model is a two stage stochastic program with recourse the dynamics of interest rates cashflow uncertainty and liquidity default and other risk premia are explicitly modeled through postulated scenarios simulation procedures are developed to generate these scenarios the optimization models are then integrated with the simulation procedures extensive validation experiments are carried out to establish the effectiveness of the model in dealing with uncertainty in particular the model is compared against the popular portfolio immunization strategy and against a portfolio based on mean absolute deviation optimization

estimating stochastic discount factor models with hidden regimes applications to commodity pricing abstract we develop new likelihood based methods to estimate factor based stochastic discount factors sdf that may accommodate hidden markov dynamics in the factor loadings we use these methods to investigate whether it is possible to find a sdf that jointly prices the cross section of eight u s portfolios of stocks treasuries corporate bonds and commodities in particular we test a range of possible different specification of the sdf including single state and hidden markov models and compare their statistical and pricing performances in addition we assess whether and to which extent a selection of these models replicates the observed moments of the return series and especially correlations we report that regime switching models clearly outperform single state ones both in term of statistical and pricing accuracy however while a four state model is selected by the information criteria a two state three factor full vector autoregression model outperforms the others as far as the pricing accuracy is concerned

is there an effect of policy related uncertainty on inflation evidence from the united states under trump this study bridges the existing literature on the macroeconomic effects of policy related uncertainty and the literature on inflation dynamics and provide fresh insights on the impacts of policy re

risk premia carry trade dynamics and economic value of currency speculation in this paper we derive the dynamics and assess the economic value of currency speculation by formalizing the concept of a trader inaction range we show that exchange rate returns comprise a time varying risk premium and that uncovered interest parity uip holds in a speculative sense the often cited forward bias puzzle originates from the omission of the risk premium in standard uip tests consistent with its popularity among market professionals the carry trade strategy can be rationalized as it systematically collects risk premia and generates economic value when applied in multi currency portfolios

the performance of stochastic dynamic and fixed mix portfolio models the purpose of this paper is to demonstrate how to evaluate stochastic programming models and more specifically to compare two different approaches to asset liability management the first uses multistage stochastic programming while the other is a static approach based on the so called constant rebalancing or fixed mix particular attention is paid to the methodology used for the comparison the two alternatives are tested over a large number of realistic scenarios created by means of simulation we find that due to the ability of the stochastic programming model to adapt to the information in the scenario tree it dominates the fixed mix approach

asset allocation with correlation a composite trade off abstract we assess the ability of minimum variance portfolio allocation strategies accounting for time varying correlation between assets to provide performance benefits relative to an equally weighted portfolio prior to transaction costs correlation based strategies emphatically outperform the equally weighted benchmark this finding is strongest for short horizon correlation forecasts and attributed to dynamic correlation as opposed to variance forecasts thus estimation error is not found to be the primary obstacle to successful portfolio optimization rather frequent rebalancing and associated transaction costs pose a significant challenge limiting portfolio turnover through short selling restrictions and greater rebalancing error tolerance results in regular outperformance of the correlation based strategies even for large transaction costs taken together these findings provide evidence of a trade off between optimal portfolio performance forecasting horizon rebalancing frequency and transaction costs