Characteristics analysis of behavioural portfolio theory in the Markowitz portfolio theory framework

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Saksham Mittal ◽  
Sujoy Bhattacharya ◽  
Satrajit Mandal
Keyword(s):  
Emerging Markets ◽  
Asset Allocation ◽  
Portfolio Theory ◽  
Optimal Portfolio ◽  
Content Type ◽  
Major Index ◽  
Brics Countries ◽  
Trade Offs ◽  
Characteristics Analysis ◽  
Mean Variance

PurposeIn recent times, behavioural models for asset allocation have been getting more attention due to their probabilistic modelling for scenario consideration. Many investors are thinking about the trade-offs and benefits of using behavioural models over conventional mean-variance models. In this study, the authors compare asset allocations generated by the behavioural portfolio theory (BPT) developed by Shefrin and Statman (2000) against the Markowitz (1952) mean-variance theory (MVT).Design/methodology/approachThe data used have been culled from BRICS countries' major index constituents from 2009 to 2019. The authors consider a single period economy and generate future probable outcomes based on historical data in order to determine BPT optimal portfolios.FindingsThis study shows that a fair number of portfolios satisfy the first entry constraint of the BPT model. BPT optimal portfolio exhibits high risk and higher returns as compared to typical Markowitz optimal portfolio.Originality/valueThe BRICS countries' data were used because the dynamics of the emerging markets are significantly different from the developed markets, and many investors have been considering emerging markets as their new investment avenues.

Interdependence and contagion in the period of crisis

2019 ◽  
Vol 14 (5) ◽  
pp. 1013-1031
Author(s):  
Carolina Macagnani dos Santos ◽  
Luiz Eduardo Gaio ◽  
Tabajara Pimenta Junior ◽  
Eduardo Garbes Cicconi
Keyword(s):  
Emerging Markets ◽  
Developed Countries ◽  
Main Hypothesis ◽  
Content Type ◽  
Brics Countries ◽  
Causality Tests ◽  
Relationship Of ◽  
Stock Indexes ◽  
The Relationship ◽  
Auto Regression

Purpose The purpose of this paper is to investigate whether the relationship of interdependence and contagion between BRICS countries and emerging non-BRICS countries is similar to that observed between developed countries and emerging BRICS countries. Design/methodology/approach The authors analyzed 15 markets: 5 BRICS, 5 developed (USA, Japan, Germany, England and France) and 5 emerging markets (Mexico, Indonesia, Turkey, Iran and Poland). Based on the time series of returns of the main stock indexes of each country, referring to the period from 2008 to 2018, the authors applied Granger causality tests, vector auto-regression and the dynamic conditional correlation-GARCH model. Findings The results led to the rejection of the main hypothesis and showed adherence to the behaviors predicted in the literature for the relations between the groups of markets. Originality/value This paper, besides analyzing the interdependence between markets in times of crisis, analyzes the effect of contagion between developed and emerging markets.

Testing the weak-form efficiency of stock markets

2015 ◽  
Vol 10 (3) ◽  
pp. 409-426 ◽  
Author(s):  
Jacinta Chikaodi Nwachukwu ◽  
Omowunmi Shitta
Keyword(s):  
Emerging Markets ◽  
Stock Prices ◽  
Stock Markets ◽  
Weak Form ◽  
Developed Countries ◽  
Risk Diversification ◽  
Content Type ◽  
Year Effect ◽  
Trade Offs ◽  
Weak Form Efficiency

Purpose – The purpose of this paper is to focus on the weak-form efficiency of 24 emerging and nine industrial stock market indices around the world. It tests for the predictability and the presence of seasonal patterns in rates of return from January 2000 to December 2010. Design/methodology/approach – It reports on the descriptive statistics for estimated monthly percentage returns. This is complemented by the use of both parametric and non-parametric techniques to test for abnormal return behaviour in stock markets. Findings – The results show that: first, emerging economies which persisted with market-oriented reforms had higher returns relative to risk, indicating their attractiveness for risk diversification; second, successive changes in stock prices were interrelated with each other and therefore contained information for predicting future prices in two-thirds of the emerging markets compared to one-third of industrial economies; and third, the turn-of-the calendar year effect was present for half of the emerging markets vis-à-vis one-quarter of the developed countries. The authors found limited support for the tax-loss selling hypothesis for both the emerging and industrial economies. Research limitations/implications – The paper fails to specifically analyse the implications for security returns of changes in technology, institutions, volume of trading and regulations in the different stock markets. Practical implications – The results should be particularly informative for foreign investors with regard to the risk diversification benefits of the various emerging and industrialised stock markets and the expected risk-return trade-offs. Originality/value – The paper provides a more powerful explanation for the role of institutional arrangements, infrastructure, culture and other country-specific risk factors in asset pricing compared to disparate case studies.

The Impact of Financial Crises on the Asset Allocation: Classical Theory Versus Behavioral Theory

2019 ◽  
Vol 32 (2) ◽  
pp. 218-236
Author(s):  
Amen Aissi Harzallah ◽  
Mouna Boujelbene Abbes
Keyword(s):  
Financial Crisis ◽  
Risk Aversion ◽  
Asset Allocation ◽  
Global Financial Crisis ◽  
Optimal Portfolio ◽  
Optimal Portfolios ◽  
The Mean ◽  
Degree Of Risk ◽  
The Impact ◽  
Mean Variance

The aim of this article is to compare the portfolio optimization generated by the behavioral portfolio theory (BPT) and the mean variance theory (MVT) by investigating the impact of the global financial crisis on the asset allocation. We use data from the Canadian Stock Exchange over the 2002–2015 period. By comparing both approaches, we show that for any level of aspiration and admissible failure, the BPT optimal portfolio will always contain a part of the mean–variance frontier. Thus, in the case of higher degree of risk aversion induced by typical BPT investors, the security set is located on the upper right of the Markowitz frontier. However, even if the optimal portfolios of MVT and BPT may coincide, MVT investors associated with an extremely low degree of risk aversion will not systematically choose BPT optimal portfolios. Our results also indicate the period of financial crisis generate huge losses in MVT portfolio values that implies a lower expected return and a higher level of risk. Furthermore, we point out the absence of the BPT optimal portfolio when potential losses are higher during the 2008 global financial crisis. JEL: G11, G17, G40

scholarly journals Application of Markowitz Portfolio Theory to Producing the World Major Field Crops

2020 ◽  
Vol 12 (4) ◽  
pp. 123-131
Author(s):  
Natalia Vasylieva
Keyword(s):  
Portfolio Theory ◽  
Global Food Security ◽  
Country Level ◽  
Trade Offs ◽  
World Markets ◽  
Markowitz Portfolio ◽  
The World ◽  
Research Outcome ◽  
Mean Variance ◽  
Global Food

Development of growing cereals and oilseeds is a pressing issue for providing global food security and renewable energy. The study deals with applying methods of portfolio theory to mitigate natural and marketing uncertainties emerged from unstable yields and volatile prices for wheat, maize, barley, sunflower, soybeans, and rapeseed. The research outcome based on the utilization of Markowitz mean-variance indicators made possible to evaluate portfolio performances of the world top cereals and oilseeds producers. The study findings at a country level combined econometric forecasting of the crop revenues and modeling optimal portfolios of cereals and oilseeds subject to acceptable trade-offs between risks and expected revenues. The fulfilled calculations with Ukrainian focus clarified farmland allocations under cereal and oilseed crops to underpin biodiversity and keep firm positions in the world markets.

Determinants of different types of bank liquidity: evidence from BRICS countries

2016 ◽  
Vol 6 (4) ◽  
pp. 380-403 ◽  
Author(s):  
Muhammad Umar ◽  
Gang Sun
Keyword(s):  
Interest Rate ◽  
Stock Market ◽  
Emerging Markets ◽  
Stock Market Index ◽  
Stock Liquidity ◽  
Content Type ◽  
Funding Liquidity ◽  
Brics Countries ◽  
Market Index ◽  
Different Types

Purpose The purpose of this paper is to explore the determinants of three different types of bank liquidity: funding liquidity, liquidity creation, and stock liquidity in emerging markets. Design/methodology/approach It uses an extensive set of data from all the listed banks of Brazil, Russia, India, China, and South Africa, collectively known as the BRICS countries, spanning the period 2002-2014. Multiple linear regression has been used to estimate the coefficients of the determinants. Findings In case of emerging markets, bank size is not a determinant of different types of liquidity, except funding liquidity. Besides, the recent financial crisis had an impact on funding liquidity as well as “cat nonfat” measure of liquidity creation but it did not affect “cat fat” measure and stock liquidity. The variation in funding liquidity is also explained by the profitability and the riskiness of the bank. Effective interest rate, national savings rate, and inflation rate are also the determinants of funding liquidity. Bank-specific determinants of liquidity creation include bank leverage and profitability, and macroeconomic determinants include stock market index, effective interest rate, and unemployment rate. The variation in stock liquidity of the bank is explained by profitability and price of stocks, trading volume, volatility of stock returns, and percentage change in real gross domestic product. Neither market capitalization nor stock market index is the determinant of stock liquidity of the banks. Research limitations/implications This study uses the data from publically listed banks only. Practical implications The findings of this study may be used by the policy makers and bank managers in the emerging markets to design better policies and to strengthen the banking system to avoid financial turmoil in future. Originality/value Most of the existing studies focus on bank liquidity in developed countries and studies aiming on emerging countries are rare. The existing studies focus more on funding liquidity and liquidity creation but to the best of the authors’ knowledge, none of the studies analyze the determinants of banks’ stock liquidity. So, this study bridges the above mentioned gaps by focusing on bank liquidity in emerging markets, and exploring the determinants of the stock liquidity of the banks.

Regime shifts and volatility in BRIICKS stock markets: an asset allocation perspective

2015 ◽  
Vol 10 (3) ◽  
pp. 383-408 ◽  
Author(s):  
Wasim Ahmad ◽  
Sanjay Sehgal
Keyword(s):  
Stock Market ◽  
Asset Allocation ◽  
Stock Markets ◽  
Regime Switching ◽  
Emerging Market ◽  
Regime Shifts ◽  
Switching Behavior ◽  
Stock Market Volatility ◽  
Content Type ◽  
Mean Variance

Purpose – The purpose of this paper is to examine the regime shifts and stock market volatility in the stock market returns of seven emerging economies popularly called as “BRIICKS” which stands for Brazil, Russia, India, Indonesia, China, South Korea and South Africa, over the period from February 1996 to January 2012 by applying Markov regime switching (MS) in mean-variance model. Design/methodology/approach – The authors apply MS model developed by Hamilton (1989) using its mean-variance switching framework on the monthly returns data of BRIICKS stock markets. Further, the estimated probabilities along with variances have been used to calculate the time-varying volatility. The authors also examine market synchronization and portfolio diversification possibilities in sample markets by calculating the Logit transformation based cross-market correlations and Sharpe ratios. Findings – The applied model finds two regimes in each of these markets. The estimated results also helped in formulating the asset allocation strategies based on market synchronization and Sharpe ratio. The results suggest that BRIICKS is not a homogeneous asset class and each market should be independently evaluated in terms of its regime-switching behavior, volatility persistence and level of synchronization with other emerging markets. The study finally concludes that Russia, India and China as the best assets to invest within this emerging market basket which can be pooled with a mature market portfolio to achieve further benefits of risk diversification. Research limitations/implications – The study does not provide macroeconomic and financial explanations of the observed differences in dynamics among sample emerging stock markets. The study does not examine these markets under multivariate framework. Practical implications – The results highlight the role of regime shifts and stock market volatility in the asset allocation and risk management. This study has important implications for international asset allocation and stock market regulation by way of identifying and recognizing the differences on regimes and on the dynamics of the swings which can be very useful in the field of portfolio and public financial management. Originality/value – The paper is novel in employing tests of MS under mean-variance framework to examine the regime shifts and volatility switching behavior in seven promising BRIICKS stock market. Further, using MS model, the authors analyze the duration (persistence) of each identified regime across sample markets. The empirical results of MS model have been used for making portfolio allocation strategies and also examine the synchronization across markets. All these aspects of stock market regime have been largely ignored by the existing studies in emerging market context particularly the BRIICKS markets.

scholarly journals Artificial intelligence model for building investment portfolio optimization mix using historical stock prices data

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sulaimon Olanrewaju Adebiyi ◽  
Oludayo Olatosimi Ogunbiyi ◽  
Bilqis Bolanle Amole
Keyword(s):  
Asset Allocation ◽  
Stock Prices ◽  
Model Building ◽  
Investment Decision ◽  
Optimal Portfolio ◽  
Mathematical Programming Problem ◽  
Investment Portfolio ◽  
Data Set ◽  
Market Prices ◽  
Content Type

Purpose The purpose of this paper is to implement a genetic algorithmic geared toward building an optimized investment portfolio exploring data set from stocks of firms listed on the Nigerian exchange market. To provide a research-driven guide toward portfolio business assessment and implementation for optimal risk-return. Design/methodology/approach The approach was to formulate the portfolio selection problem as a mathematical programming problem to optimize returns of portfolio; calculated by a Sharpe ratio. A genetic algorithm (GA) is then applied to solve the formulated model. The GA lead to an optimized portfolio, suggesting an effective asset allocation to achieve the optimized returns. Findings The approach enables an investor to take a calculated risk in selecting and investing in an investment portfolio best minimizes the risks and maximizes returns. The investor can make a sound investment decision based on expected returns suggested from the optimal portfolio. Research limitations/implications The data used for the GA model building and implementation GA was limited to stock market prices. Thus, portfolio investment that which to combines another capital market instrument was used. Practical implications Investment managers can implement this GA method to solve the usual bottleneck in selecting or determining which stock to advise potential investors to invest in, and also advise on which capital sharing ratio to reduce risk and attain optimal portfolio-mix targeted at achieving an optimal return on investment. Originality/value The value proposition of this paper is due to its exhaustiveness in considering the very important measures in the selection of an optimal portfolio such as risk, liquidity ratio, returns, diversification and asset allocation.

The changing benefits of global equity investing: Developed and emerging markets, 1997–2007

2007 ◽  
Vol 57 (4) ◽  
pp. 343-362
Author(s):  
I. Magas
Keyword(s):  
Emerging Markets ◽  
Asset Allocation ◽  
Financial Integration ◽  
Efficient Frontier ◽  
Equity Markets ◽  
International Diversification ◽  
Affirmative Answer ◽  
Trade Offs ◽  
The Us ◽  
International Equity

Are there any long standing benefits in international equity investing? Did the acceleration of global financial integration bring clearly measurable benefits to international equity investors? Is there a convergence of equity market profitability around the world? These are the main questions of this paper. All of these questions got an affirmative answer, but, as it may be immediately suspected, many durable qualifiers and caveats apply. Section 1 reviews some key propositions of modern investment theory and some recent evidence on the benefits of international asset allocation on equity markets. It is argued that the desired benefits — as predicted by theory — can be and have been captured in terms of better risk/return trade-offs due to international diversification of equity portfolios. Manifest benefits aside, however, many dampening factors come into play when considering long term capacities of realising these benefits. Mainly the changing correlation structure of global markets and the increased currency risk, which still remained very difficult to hedge, were identified as permanent factors to limit the power of international diversification in pushing out the efficient frontier of the equity set. Section 2 presents comparative evidence on global equity markets’ performance and gives an account of the wide variations in the US dollar denominated returns of major markets, developed and emerging. There is some support to the view that a certain convergence can be depicted in the profitability levels of different markets. Exchange rate movements, however, accounted for almost one third of variations in profitability on average. As of April 2007, stock market valuations did favour emerging markets (and to some extent EU-27) when compared to Japan or the US.

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