scholarly journals Enhanced indexation via chance constraints

2020 ◽  
Author(s):  
Patrizia Beraldi ◽  
Maria Elena Bruni
Keyword(s):  
Investment Strategy ◽  
Chance Constraints ◽  
Portfolio Performance ◽  
Investment Strategies ◽  
Index Tracking ◽  
Negative Deviation ◽  
Additional Risk ◽  
Benchmark Instances ◽  
Out Of Sample ◽  
The Empirical Analysis

Abstract The enhanced index tracking (EIT) represents a popular investment strategy designed to create a portfolio of assets that outperforms a benchmark, while bearing a limited additional risk. This paper analyzes the EIT problem by the chance constraints (CC) paradigm and proposes a formulation where the return of the tracking portfolio is imposed to overcome the benchmark with a high probability value. Besides the CC-based formulation, where the eventual shortage is controlled in probabilistic terms, the paper introduces a model based on the Integrated version of the CC. Here the negative deviation of the portfolio performance from the benchmark is measured and the corresponding expected value is limited to be lower than a given threshold. Extensive computational experiments are carried out on different set of benchmark instances. Both the proposed formulations suggest investment strategies that track very closely the benchmark over the out-of-sample horizon and often achieve better performance. When compared with other existing strategies, the empirical analysis reveals that no optimization model clearly dominates the others, even though the formulation based on the traditional form of the CC seems to be very competitive.

The impact of politics and economic policy uncertainty on anomaly-based investment strategies

2019 ◽  
Vol 45 (5) ◽  
pp. 654-670
Author(s):  
Cedric Mbanga ◽  
Jeffrey Scott Jones ◽  
Seth A. Hoelscher
Keyword(s):  
Economic Policy ◽  
Hedge Funds ◽  
Investment Strategy ◽  
Portfolio Performance ◽  
Policy Uncertainty ◽  
Investment Strategies ◽  
Party Affiliation ◽  
Content Type ◽  
Economic Policy Uncertainty ◽  
The Impact

Purpose The purpose of this paper is to explore the overlooked relationship between politics and the performance of anomaly-based investment strategies. Design/methodology/approach Monthly long-short portfolios are formed based on relative mispricing scores according to the Stambaugh et al. (2012, 2015) relative mispricing measure. Portfolio performance is examined throughout various presidential terms. The design also introduces economic policy uncertainty (EPU) as a possible explanatory variable for portfolio performance. Findings The analysis reveals that anomaly-based returns are higher under Republican administrations than they are under Democratic administrations. Moreover, the results show that the impact of EPU on the relationship between the political party affiliation of the president and future anomaly-based returns are driven by the election and post-election years. Practical implications The examination of returns on a long-short portfolio may be of particular value to investment companies, such as hedge funds, who regularly employ this type of strategy. Originality/value While the impact of presidential terms on raw equity returns has been well examined, the paper is the first to examine the impact of presidential terms on the return of an anomaly-based investment strategy. EPU is also introduced as an important contributing factor.

Investments, Market Timing and Portfolio Performance across Indian Bull and Bear Markets

2017 ◽  
Vol 13 (3-4) ◽  
pp. 98-109
Author(s):  
Sunaina Kanojia ◽  
Neha Arora
Keyword(s):  
Stock Market ◽  
Market Timing ◽  
Investment Strategy ◽  
Portfolio Performance ◽  
Investment Strategies ◽  
Bear Market ◽  
Market Trends ◽  
Two Phases ◽  
The Universe

The returns generated from an investment alternative are exponentially higher when espoused with appropriate timings. This article expound on the market timing used by investors to formulate profitable investment strategies in the stock market, which requires gathering of information at both micro- and macro-levels along with market trends to make timely decisions and evaluating the universe of stocks available. The market trends are been broadly classified into bull and bear phases, which have dynamic influence on buying and selling in the stock market. Further, the study supports the retail investors’ participation in the market for long-term to generate higher returns as compared to other conventional alternatives. The study attempts to identify bull and bear market turning points using a formal turning point identification procedure and formulate a profitable investment strategy in bull or bear market phases to maximise the returns. Hence, the present study provides to understand how the two phases influence investment decisions and determine the implications of bull and bear market phases on investors’ investment strategy.

scholarly journals Regularized Maximum Diversification Investment Strategy

Econometrics ◽  
2020 ◽  
Vol 9 (1) ◽  
pp. 1
Author(s):  
N’Golo Koné
Keyword(s):  
Covariance Matrix ◽  
Estimation Error ◽  
Investment Strategy ◽  
Minimum Variance ◽  
Sharpe Ratio ◽  
Tuning Parameter ◽  
Portfolio Performance ◽  
Asset Return ◽  
Out Of Sample ◽  
Global Minimum Variance Portfolio

The maximum diversification has been shown in the literature to depend on the vector of asset volatilities and the inverse of the covariance matrix of the asset return covariance matrix. In practice, these two quantities need to be replaced by their sample statistics. The estimation error associated with the use of these sample statistics may be amplified due to (near) singularity of the covariance matrix, in financial markets with many assets. This, in turn, may lead to the selection of portfolios that are far from the optimal regarding standard portfolio performance measures of the financial market. To address this problem, we investigate three regularization techniques, including the ridge, the spectral cut-off, and the Landweber–Fridman approaches in order to stabilize the inverse of the covariance matrix. These regularization schemes involve a tuning parameter that needs to be chosen. In light of this fact, we propose a data-driven method for selecting the tuning parameter. We show that the selected portfolio by regularization is asymptotically efficient with respect to the diversification ratio. In empirical and Monte Carlo experiments, the resulting regularized rules are compared to several strategies, such as the most diversified portfolio, the target portfolio, the global minimum variance portfolio, and the naive 1/N strategy in terms of in-sample and out-of-sample Sharpe ratio performance, and it is shown that our method yields significant Sharpe ratio improvements.

Mutual fund management in the period of financial crisis

2017 ◽  
Vol 31 (2) ◽  
pp. 75-81
Author(s):  
О. А. Bank
Keyword(s):  
Financial Crisis ◽  
Mutual Fund ◽  
Economic Recession ◽  
Investment Strategy ◽  
Economic Conditions ◽  
Investment Strategies ◽  
Fixed Income ◽  
Fund Management ◽  
Fund Managers ◽  
Different Types

Mutual fund managers do not have full freedom in choosing investment strategies - they are limited both by the laws and by investment declarations of the funds. Investment strategy cannot be fully changed even in financial crisis but it only can be corrected. This fact could not be characterized as a disadvantage because different types of funds are efficient in different time even during the same economic recession. Mutual fund manager should rationally invest funds of their clients: it is better to keep the maximum possible part of the portfolio in cash and instruments with fixed income on the declining market and it is better to keep shares on the rising market. However the choice of bonds also as the choice of shares should pay respect for the features of these instruments during unfavorable economic conditions. Russian mutual fund management differs from fund management in other countries as in stable economic situation so in the circumstances of financial crisis.

On portfolio optimization

2016 ◽  
Vol 17 (3) ◽  
pp. 295-309 ◽  
Author(s):  
Theo Berger ◽  
Christian Fieberg
Keyword(s):  
Minimum Variance ◽  
Factor Models ◽  
Scale Factor ◽  
Covariance Matrices ◽  
Portfolio Performance ◽  
Content Type ◽  
Portfolio Decisions ◽  
Multi Scale ◽  
Out Of Sample ◽  
Factor Returns

Purpose The purpose of this paper is to show how investors can incorporate the multi-scale nature of asset and factor returns into their portfolio decisions and to evaluate the out-of-sample performance of such strategies. Design/methodology/approach The authors decompose daily return series of common risk factors and of all stocks listed in the Dow Jones Industrial Index (DJI) from 2000 to 2015 into different time scales to separate short-term noise from long-run trends. Then, the authors apply various (multi-scale) factor models to determine variance-covariance matrices which are used for minimum variance portfolio selection. Finally, the portfolios are evaluated by their out-of-sample performance. Findings The authors find that portfolios which are constructed on variance-covariance matrices stemming from multi-scale factor models outperform portfolio allocations which do not take the multi-scale nature of asset and factor returns into account. Practical implications The results of this paper provide evidence that accounting for the multi-scale nature of return distributions in portfolio decisions might be a promising approach from a portfolio performance perspective. Originality/value The authors demonstrate how investors can incorporate the multi-scale nature of returns into their portfolio decisions by applying wavelet filter techniques.

Large-cap vs small-cap portfolio performance: new empirical evidence from ETFs

2019 ◽  
Vol 18 (1) ◽  
pp. 71-94
Author(s):  
Gerasimos Rompotis
Keyword(s):  
Design Methodology ◽  
Portfolio Performance ◽  
Exchange Traded Funds ◽  
Investment Strategies ◽  
Time Data ◽  
Content Type ◽  
Risk Characteristics ◽  
The Usa ◽  
First Time ◽  
Practical Implications

PurposeA well-documented pattern in the literature concerns the outperformance of small-cap stocks relative to their larger-cap counterparts. This paper aims to address the “small-cap versus large-cap” issue using for the first time data from the exchange traded funds (ETFs) industry.Design/methodology/approachSeveral raw return and risk-adjusted return metrics are estimated over the period 2012-2016.FindingsResults are partially supportive of the “size effect”. In particular, small-cap ETFs outperform large-cap ETFs in overall raw return terms even though they fail the risk test. However, outperformance is not consistent on an annual basis. When risk-adjusted returns are taken into consideration, small-cap ETFs are inferior to their large-cap counterparts.Research limitations/implicationsThis research only covers the ETF market in the USA. However, given the tremendous growth of ETF markets worldwide, a similar examination of the “small vs large capitalization” issue could be conducted with data from other developed ETF markets in Europe and Asia. In such a case, useful comparisons could be made, so that we could conclude whether the findings of the current study are unique and US-specific or whether they could be generalized across the several international ETF markets.Practical implicationsA possible generalization of the findings would entail that profitable investment strategies could be based on the different performance and risk characteristics of small- and large-cap ETFs.Originality/valueThis is the first study to examine the performance of ETFs investing in large-cap stock indicesvis-à-visthe performance of ETFs tracking indices comprised of small-cap stocks.

scholarly journals Effectiveness of Selected Investment Strategies in the Opinion of Polish Individual Investors Depending on their Personal Preferences

2020 ◽  
Vol 13 (4) ◽  
pp. 442-451
Author(s):  
Katarzyna Daniluk
Keyword(s):  
Risk Aversion ◽  
Investment Strategy ◽  
Capital Allocation ◽  
Survey Method ◽  
Individual Investors ◽  
Investment Horizon ◽  
Investment Strategies ◽  
Research Material ◽  
Individual Needs ◽  
Level Of Risk

SummarySubject and purpose of work: The work aimed at identifying and characterising the interdependence between Polish investors’ personal preferences in investing and their opinion about the effectiveness of investment strategies. It was examined how the adopted investment horizon, the level of risk aversion and the time spent daily on investing impact the interviewees’ experiences and opinions on the effectiveness of investment strategies.Materials and methods: As the survey method was employed, a questionnaire was sent to randomly selected Polish individual investors. The research material consisted of 652 questionnaire forms.Results: The study showed a relevant dependence between Polish investors’ personal preferences and their opinions on the effectiveness of the particular strategies.Conclusions: The interdependencies revealed in the study may be used by potential investors in the process of matching a strategy to individual needs so as to enhance the effectiveness of the choice. A higher awareness of the problem of matching an investment strategy to personal preferences will lead to improved effectiveness of capital allocation among Polish investors.

Investment Strategies for Sourcing a New Technology in the Presence of a Mature Technology

2021 ◽  
Author(s):  
Wei Zhang ◽  
Hsiao-Hui Lee
Keyword(s):  
Operations Management ◽  
New Technologies ◽  
New Technology ◽  
Investment Strategy ◽  
Profit Sharing ◽  
Development Effort ◽  
Investment Strategies ◽  
Cost Shifting ◽  
The One ◽  
The Cost

To stay competitive, high-technology manufacturers not only frequently source new technologies from their suppliers, but also financially support the development of these new technologies into component products or production tools. We consider a manufacturer that can either source a new but immature technology from a financially constrained supplier, or source a mature technology from an existing supplier if and only if the development of the new technology fails. To support the new technology, the manufacturer can choose to inject capital in the form of an equity or loan. The investment strategy not only affects the new supplier’s development effort and the probability of technical success (PTS), but also affects the existing supplier’s effort to improve the mature technology, which presents the manufacturer with a trade-off. Following the debt financing literature, we find that a loan contract is associated with a cost-shifting effect and often leads to a higher PTS. However, because the manufacturer not only maintains an investment but also a procurement relationship with the new supplier, we find a profit-sharing effect associated with an equity investment, which does not exist in the traditional equity issuance literature. In particular, we show that the profit-sharing effect can dominate the cost-shifting effect and lead to a higher PTS when the new supplier’s technological capability is sufficiently high. Nonetheless, we also show that the strategy that derives a higher PTS does not necessarily generate a higher payoff for the manufacturer. On the one hand, a loan can be preferred even when it leads to a lower PTS because the cost-shifting effect allows the manufacturer to offer a sufficiently low procurement payment while maintaining a sufficiently high PTS. On the other hand, when the existing supplier is very capable of reducing its costs, a loan can over-incentivize the new supplier to exert excessive effort and backfire. This paper was accepted by Charles Corbett, operations management.

Sign in / Sign up

Export Citation Format

Share Document