Relationships Between Returns in EU Equity Markets in 2005–2016: Implications for Portfolio Risk Diversification

AbstractIn the literature, there is no standard approach for estimating the return to wine or testing for a portfolio risk diversification benefit from holding wine. Using auction data for Australian wine, we show that the estimation method has a material impact on the estimated wine return distribution and that the type of diversification benefit test used influences whether or not wine is found to provide a portfolio risk diversification benefit. Our results indicated that a simple modification to the hedonic model, which we call a pooled model, is an appropriate method for estimating the return to infrequently traded heterogeneous assets such as wine. Across the various approaches to testing for a risk diversification benefit, we find direct estimation of the efficient frontier with bootstrapped confidence intervals to be the most transparent and comprehensive method of illustrating wine's potential for lowering portfolio risk. (JEL Classifications: G11, C61, C13)

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ENDOGENOUS CROSS CORRELATIONS

Macroeconomic Dynamics ◽

10.1017/s1365100507060270 ◽

2007 ◽

Vol 11 (S1) ◽

pp. 124-153 ◽

Cited By ~ 2

Author(s):

STEPHEN E. SATCHELL ◽

STEFFI J.-H. YANG

Keyword(s):

Financial Regulation ◽

Equity Markets ◽

Portfolio Diversification ◽

Current View ◽

Investment Behavior ◽

Portfolio Risk ◽

Herd Effect ◽

Cross Correlations ◽

Asymmetric Correlation ◽

The Relationship

This paper studies the relationship between rational herding and cross correlations in security returns. It demonstrates analytically and numerically that herding, as a temporary, fragile convergence of investment behavior, can endogenously induce asset dependency. Furthermore, there exists a self-reinforcing process, in which market extreme events amplify the herd effect, which further exacerbates asset dependency. Considering the Taiwan and U.K. equity markets, we find that the simulated markets in the presence of herding have results closer to the real patterns of asset dependency than a static model with isolated, noninteracting individuals. Our findings cast doubts on the current view that transparent financial regulation is always desirable. Moreover, this paper finds statistical evidence of asymmetric correlation patterns in both the top 50 stocks in the U.K. and Taiwan equity markets. This suggests that portfolio diversification as a means of managing portfolio risk is unlikely to be effective in periods of extreme losses in these markets.

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The Effectiveness of Portfolio Risk Diversification: An Additive Approach by Project Replication

Project Management Journal ◽

10.1002/pmj.21526 ◽

2015 ◽

Vol 46 (5) ◽

pp. 94-110 ◽

Cited By ~ 3

Author(s):

Jean-Paul Paquin ◽

David Tessier ◽

Céline Gauthier

Keyword(s):

Portfolio Risk ◽

Risk Diversification

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Quaternion Valued Risk Diversification

Entropy ◽

10.3390/e22040390 ◽

2020 ◽

Vol 22 (4) ◽

pp. 390 ◽

Cited By ~ 1

Author(s):

Seisuke Sugitomo ◽

Keiichi Maeta

Keyword(s):

Portfolio Optimization ◽

Optimization Algorithms ◽

Construction Method ◽

Portfolio Construction ◽

Portfolio Risk ◽

Risk Diversification ◽

Portfolio Managers

Risk diversification is an important topic for portfolio managers. Various portfolio optimization algorithms have been developed to minimize portfolio risk under certain constraints. As an extension of the complex risk diversification portfolio proposed by Uchiyama, Kadoya, and Nakagawa in January 2019 (Yusuke et al. Entropy. 2019, 21, 119.), we propose a risk diversification portfolio construction method which incorporates quaternion risk. We show that the proposed method outperforms the conventional complex risk diversification portfolio method.

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Risk Diversification Between Stock Markets In Germany And Bosnia And Herzegovina

South East European Journal of Economics and Business ◽

10.2478/jeb-2014-0003 ◽

2015 ◽

Vol 9 (1) ◽

pp. 30-36 ◽

Cited By ~ 1

Author(s):

Azra Zaimović ◽

Almira Arnaut Berilo

Keyword(s):

Stock Market ◽

Portfolio Management ◽

Stock Prices ◽

Stock Markets ◽

Western Europe ◽

Academic Research ◽

Equity Markets ◽

International Diversification ◽

Information Costs ◽

Risk Diversification

Abstract The integration of global equity markets has been a well-studied topic in the last few decades, particularly after stock market crashes. Most studies have focused on developed markets such as the US, Western Europe and Japan. The findings were that the degree of international co-movements among stock prices has substantially increased in the post-crash regime. In this paper we research the co-movements of German and Bosnian stock markets during and after the recent economic and financial crisis. International market integration means that assets of equal risk provide the same expected returns across integrated markets. This means fewer opportunities for risk diversification if the markets are integrated. It is also believed that stock market indices of integrated markets move together over the long run with the possibility of short-run divergence. There is considerable academic research on the benefits of international diversification. Investors who buy stocks in domestic as well in foreign markets seek to reduce risk through international diversification. The risk reduction takes place if the various markets are not perfectly correlated. The increasing correlation among markets during and after the crises has restricted the scope for international diversification. International stock market linkages are the subject of extensive research due to rapid capital flows between countries because of financial deregulation, lower transaction and information costs, and the potential benefits from international diversification. Most stock markets in the world tend to move together, in the same direction, implying positive correlation. In and after crises they tend to move together even more strongly. Thus, this paper aims to research if there are any diversification opportunities by spreading out investments across developed and underdeveloped capital markets. This research attempts to examine the scope of international diversification between German and Bosnian equity markets during the 6-year period from 2006 to 2011. We test the hypothesis of whether there are any risk diversification possibilities by spreading out the investments between German and Bosnian equity markets. In order to determine the mean-variance efficiency of portfolios we use the method of convex (quadratic and linear) programming. The hypothesis is tested with the Markowitz portfolio optimization method using our own software. The results of this research might enhance the efficiency of portfolio management for both types of capital market under analysis, and prove especially useful for institutional investors such as investment funds.

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Strategy of asset portfolio risk diversification through value drivers

REBRAE - Revista Brasileira de Estrategia ◽

10.7213/rebrae.08.001.ao04 ◽

2015 ◽

Vol 8 (1) ◽

pp. 53

Author(s):

Francisco Roberto Farias Guimarães Júnior ◽

Charles Ulises De Montreuil Carmona ◽

Luciana Gondim de Almeida Guimarães

Keyword(s):

Stock Exchange ◽

Selection Process ◽

Stock Exchanges ◽

Portfolio Risk ◽

Value Drivers ◽

Decision Matrix ◽

High Positive Correlation ◽

Risk Diversification ◽

Asset Portfolio

The risk diversification of an asset portfolio of investments is underlying in the idea that all securities have an idiosyncratic behavior which allows compensating a specific stock loss by the gain achieved by other stock into the portfolio. However, we know that the portfolio selection process should excel for choosing assets capable of creating and generating value on the long term. Thus, the objective of this research was to verify if the portfolios selected through their value drivers present the diversification benefits that were determined in prior researches. We had used the data available at Economatica data base of the following Stock Exchanges: Argentina; Brazil; Chile; and Mexico. To select the portfolios by value drivers we used a model based upon the weighted factors decision matrix where the securities were hierarchized by their grades. The variables used as factors, were the Tobin’s Q, Beta, Leverage, Price/Earning Ratio, and the Price Sales Ratio. All portfolios were compared with that selected through Markowitz (1952) model. The results show us that the portfolios selected through value drivers have obtained the benefits of the diversification process convergent with prior researches. On the other hand, we verified that the stocks amount into portfolios constructed through Markowitz (1952) model have had high positive correlation with the stocks amount in the Stock Exchange what resulted in portfolios with 44 assets, for instance. For future studies we suggest: the using of generalized linear model instead the multiple regressions to figure out the factor weights; to use others fundamentalist variables; to apply this study in other Stock Exchanges.

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Risk Diversification In World Stock Markets

International Business & Economics Research Journal (IBER) ◽

10.19030/iber.v4i10.3625 ◽

2011 ◽

Vol 4 (10) ◽

Author(s):

H. Christine Hsu ◽

H. Jeffrey Wei

Keyword(s):

Risk Reduction ◽

Stock Markets ◽

Portfolio Risk ◽

Global Risk ◽

Risk Diversification ◽

The Us ◽

The World ◽

Reduction Effect ◽

Highly Correlated ◽

The U.S

The benefit of risk diversification refers to the reduction in the portfolio risk when different stocks are combined into a portfolio. This risk reduction benefit exists because not all stocks are moving together through time; this is presumably true for stocks from different countries. The smaller the degree of co-movements in the world stock markets (i.e., the less the correlation between the markets), the greater is the risk reduction effect. Thus, it makes sense for a US investor to invest globally as long as the foreign stock markets are not highly correlated with the U.S. market. Nevertheless, recent evidence shows that the correlations between the U.S. and various foreign stock markets are evolving through time due to the integration of world capital markets and international capital flows. Now that we witness the increased interdependence of the world stock markets, does it still make sense to diversify globally? In this paper, we address the question of global risk diversification from the US perspective.

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A revisit to stock market contagion and portfolio hedging strategies

International Journal of Law and Management ◽

10.1108/ijlma-03-2016-0026 ◽

2017 ◽

Vol 59 (5) ◽

pp. 618-635 ◽

Cited By ~ 1

Author(s):

Amanjot Singh ◽

Manjit Singh

Keyword(s):

Equity Markets ◽

Optimal Portfolio ◽

Portfolio Risk ◽

Content Type ◽

Crisis Period ◽

Hedging Strategies ◽

Hedge Ratios ◽

The Us ◽

Market Contagion ◽

Optimal Hedge

Purpose This paper aims to attempt to re-capture the stock market contagion effect from the US to the BRIC equity markets during the recent global financial crisis in a multivariate framework. Apart from this, the study also identifies optimal portfolio hedging strategies to minimize the underlying portfolio risk during the period undertaken for the purpose of study. Design/methodology/approach To account for the dynamic interactions, the study uses vector autoregression (p) dynamic conditional correlation (DCC)-asymmetric generalized autoregressive conditional heteroskedastic (1,1) model in a multivariate framework, coupled with a monthly heat map relating to the co-movement between the US and the BRIC equity markets during the period 2007-2009. Finally, by following the studies, Hammoudeh et al. (2010) and Syriopoulos et al. (2015), the time-varying optimal portfolio hedge ratios and weights are computed. Findings The results report a contagion impact of the US subprime crisis (following the collapse of the Lehman Brothers) on the Indian and Russian stock markets only. On the other hand, a higher degree of interdependence between the US and Brazilian market has been observed. The US and Chinese equity markets indicate a relatively lower level of interdependence among themselves. The optimal hedge ratios are found to be most effective for a portfolio comprising the US and Chinese stocks even during the crisis period. A US investor should invest approximately 30 cents in the Indian market and rest of the 70 cents in the US market in a US$1 portfolio to minimize the portfolio risk without lowering the expected returns. During the crisis period (2007-2009), the optimal portfolio weights indicate a higher weightage to the BRIC stocks. Practical implications The results support the construction of optimal US–BRIC stock portfolios and provide an insight to the investors and policy makers both domestic as well as international, with regard to the contagion impact and interdependence, especially during a crisis period. Originality/value The study uses a DCC model in a multivariate framework instead of bivariate, wherein all the markets are factored into a single interaction framework across a very long period (2004-2014). Second, a heat map of monthly correlation combinations has been created for the period 2007-2009, to comprehend the contagion impact or interdependence among the markets. Finally, the study ascertains time-varying optimal hedge ratios and portfolio weights for a two asset portfolio, from a US investor viewpoint, making the study first of its kind in all the perspectives.

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CAUSALITY AMONG NEW YORK, LONDON, TOKYO AND HONG KONG STOCK MARKETS

Australian Journal of Business and Management Research ◽

10.52283/nswrca.ajbmr.20110104a14 ◽

2011 ◽

Vol 01 (04) ◽

pp. 122-131

Author(s):

Nissim Ben David

Keyword(s):

New York ◽

Hong Kong ◽

Granger Causality ◽

Stock Markets ◽

Equity Markets ◽

Rate Of Change ◽

Portfolio Risk ◽

Daily Data ◽

Global Linkages

Investors tend to look into the possibility of broadening their investment activities across countries in order to diversify portfolio risk. This requires an understanding of regional and global linkages of stock markets. In this study, I examine the co-movements in worlds' largest equity markets. I used the daily data of S&P 500, Nikkey 225, Hang Seng and FTSE100 for the period Jan-Nov 2009 in order to examine causality between the markets. Granger causality results show that eastern markets are affected by both S&P 500 and FTSE100, but do not affect western markets. Estimating the rate of change of each index as a function of its lags and of the lags of indexes that were found to granger-cause it, I find a very low predictability for S&P 500, Hang Seng and FTSE100 ,while the Nikkey 225 is pretty highly predictable.

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