scholarly journals Evaluation Period and Agency Problem in Outsourced Chief Investment Officer (OCIO)

2020 ◽  
Vol 28 (1) ◽  
pp. 135-157
Author(s):  
Jun Ho Shin ◽  
Dongyoup Lee
Keyword(s):  
Portfolio Choice ◽  
Agency Problem ◽  
Investment Horizon ◽  
Investment Performance ◽  
Evaluation Period ◽  
Risky Assets ◽  
Fund Managers ◽  
Liability Management ◽  
Portfolio Weight

This article investigates the effect of the performance evaluation period on the long-term investment portfolio choice and the agency problem of outsourced investments. Though investors with the prospect utility are required to raise the portfolio weight on risky assets such as stocks for a long investment horizon, institutional investors and professional fund managers cannot help lowering the portfolio weight on risky assets to minimize the loss and to avoid disappointing clients with a short evaluation period. We find empirical evidence in the Korean capital market that stocks and bonds are indifferent to investors with the prospect utility for an evaluation period with 16 months and the optimal portfolio weight of stocks and bonds is 30% to 70%. Therefore there exists the agency problem between investors (principal) and managers (agent) due to frequent performance evaluations, which is able to explain current excessive investment in fixed income markets of most national pension funds. Our result implies that we need to consider extending the evaluation period of the investment performance to achieve the goal of asset and liability management (ALM) of national long-term funds in this low-interest-rate environment.

Economic Benefits of Derivatives for Long Term Investments-Equity Linked Securities

2019 ◽  
Vol 27 (2) ◽  
pp. 211-252
Author(s):  
Byung Jin Kang
Keyword(s):  
Risk Aversion ◽  
Decision Rules ◽  
Economic Benefits ◽  
Optimal Portfolio ◽  
Investment Horizon ◽  
Risky Assets ◽  
Knock Out ◽  
Medium Level ◽  
Low Degrees

In this paper, we examined the economic benefits of derivatives in the aspect of investment assets. Our study differs from previous studies in that it analyzed the differences in the economic benefits of derivatives between for short term investors and for long term investors, and focused on the equity linked securities (ELS) rather than plain vanilla derivatives. We found the following results from the analysis over 1 to 20 years of investment horizons for four different types of equity linked securities, including ‘Auto-callable ELS’, ‘Knock-out ELS’, ‘Digital ELS’ and ‘Reverse Convertible ELS.’ First, equity linked securities contribute to improving the performance of the optimal portfolio for most investors, except for some investors who have extremely low degrees of risk aversion. Second, these economic benefits of equity linked securities are consistently observed regardless of investment horizon. Third, investment demand for equity linked securities is higher for investors with a medium-level of risk aversion rather than for aggressive or conservative investors. In addition, equity linked securities are mainly used as substitutes for risk-free bonds rather than risky assets (i.e., stocks). Finally, most of our results are still valid even when different market environments are assumed or alternative decision rules are used to derive investors’ optimal portfolio.

scholarly journals Robust hedging in incomplete markets

2018 ◽  
Vol 18 (3) ◽  
pp. 473-493 ◽  
Author(s):  
SALLY SHEN ◽  
ANTOON PELSSER ◽  
PETER SCHOTMAN
Keyword(s):  
Incomplete Markets ◽  
Pension Fund ◽  
Model Misspecification ◽  
Risk Exposure ◽  
Investment Horizon ◽  
Case Scenario ◽  
Worst Case ◽  
Risky Assets ◽  
Substantial Risk

AbstractWe considered a pension fund that needs to hedge uncertain long-term liabilities. We modeled the pension fund as a robust investor facing an incomplete market and fearing model uncertainty for the evolution of its liabilities. The robust agent is assumed to minimize the shortfall between the assets and liabilities under an endogenous worst-case scenario by means of solving a min–max robust optimization problem. When the funding ratio is low, robustness reduces the demand for risky assets. However, cherishing the hope of covering the liabilities, a substantial risk exposure is still optimal. A longer investment horizon or a higher funding ratio weakens the investor's fear of model misspecification. If the expected equity return is overestimated, the initial capital requirement for hedging can be decreased by following the robust strategy.

scholarly journals A Dynamic Mean-Variance Analysis for Log Returns

2020 ◽  
Author(s):  
Min Dai ◽  
Hanqing Jin ◽  
Steven Kou ◽  
Yuhong Xu
Keyword(s):  
Portfolio Choice ◽  
Choice Model ◽  
Risky Assets ◽  
Complete Market ◽  
Dynamic Portfolio ◽  
Short Sell ◽  
Dynamic Portfolio Choice ◽  
Risk Free Rate ◽  
Mean Variance

We propose a dynamic portfolio choice model with the mean-variance criterion for log returns. The model yields time-consistent portfolio policies and is analytically tractable even under some incomplete market settings. The portfolio policies conform with conventional investment wisdom (e.g., richer people should invest more absolute amounts of money in risky assets; the longer the investment time horizon, the more proportional amount of money should be invested in risky assets; and for long-term investment, people should not short-sell major stock indices whose returns are higher than the risk-free rate), and the model provides a direct link with the constant relative risk aversion utility maximization in a complete market. This paper was accepted by Kay Giesecke, finance.

Option Demands and Investment Horizon Effects

2016 ◽  
Vol 24 (4) ◽  
pp. 619-646
Author(s):  
Byung Jin Kang
Keyword(s):  
Portfolio Choice ◽  
Global Financial Crisis ◽  
Optimal Choice ◽  
Investment Horizon ◽  
Options Market ◽  
Index Options ◽  
Intraday Data ◽  
Short Horizon ◽  
The Global Financial Crisis

This paper investigates the effect of investment horizon on the optimal portfolio choice of investors, who can access to index options market. This is to reconcile the empirical anomaly of Driessen and Maenhout (2007), which suggested that it is always optimal to short OTM puts and ATM straddles, regardless of investors’ preferences. Using the intraday data on KOSPI200 index options, one of the most actively traded options in the world, we analyze the differences in optimal choice between ‘position traders (i.e., long-term investors)’ and ‘day traders (i.e., short-term investor)’. Our main empirical findings are summarized as follows. First, short horizon investors who do not want to hold overnight option positions tend to optimally take a long position in options, whereas long horizon investors tend to hold short option positions. Second, these differences in optimal choice between short- and long-horizon investors are clearly evident in OTM puts rather than ATM straddles. Finally, our empirical findings are still valid even after considering alternative preferences structures of investors, transaction costs, different data filtering rules, and the effect of the Global financial crisis.

Do lump-sum investing strategies really outperform dollar-cost averaging strategies?

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Richard Lu ◽  
Vu Tran Hoang ◽  
Wing-Keung Wong
Keyword(s):  
High Risk ◽  
Asset Price ◽  
Trading Strategy ◽  
Performance Measure ◽  
Investment Horizon ◽  
Risky Assets ◽  
Content Type ◽  
Holding Period ◽  
Lump Sum

Purpose The literature has demonstrated that lump-sum (LS) outperforms dollar-cost averaging (DCA) in uptrend markets while DCA outperforms LS only when the asset price is mean-reverted or downtrend. To bridge the gap in the literature, this study aims to use both Sharpe ratio (SR) and economic performance measure (EPM) to compare the performance of DCA and LS under both accumulative and disaccumulative approaches when the asset price is simulated to be uptrend. Design/methodology/approach This study uses both disaccumulative and accumulative approaches to compare DCA with LS and uses both SR and EPM to evaluate their performance when the asset price is simulated to be uptrend. Instead of using the annualized returns that are commonly used by other DCA studies, we compute the holding-period returns in the comparison in this paper. Findings The simulation shows that no matter which approach is used, DCA outperforms LS in nearly all the cases in the less uptrend markets while DCA still performs better than LS in many cases of the uptrend markets, especially when the market is more volatile and investment horizon is long, regardless which approach the authors used. The authors also find more evidence supporting DCA over LS by using EPM, which is more suitable in the analysis because the returns generated by DCA are positive skewed and flat-tailed that are ignored when SR is used. Research limitations/implications The authors conclude that DCA is a better trading strategy than LS for investment even in the uptrend market, especially on high risky assets. Practical implications Investors could consider choosing DCA instead of LS as their trading strategy, especially when they prefer long term investment and investing in high-risk assets. Social implications Fund managers could consider recommending DCA to their customers, especially when they prefer long term investment and investing in high-risk assets. Originality/value This is the own study and, as far as the authors know, this is the first study in the literature uses both SR and EPM to compare the performance of DCA and LS under both accumulative and disaccumulative approaches when the asset price is simulated to be uptrend.

Portfolio Choice toward Long-Term Mutual Funds in Thailand

2017 ◽  
Author(s):  
Adisorn Promkaewngarm ◽  
Jirarat Pipatnarapong ◽  
Natdanai Aleenajitpong ◽  
Sompong Promsa-ad
Keyword(s):  
Mutual Funds ◽  
Portfolio Choice

scholarly journals Long-Term Sustainable Investment for Retirement

2021 ◽  
Vol 13 (9) ◽  
pp. 5000
Author(s):  
Iqbal Owadally ◽  
Jean-René Mwizere ◽  
Neema Kalidas ◽  
Kalyanie Murugesu ◽  
Muhammad Kashif
Keyword(s):  
Mutual Funds ◽  
Performance Metrics ◽  
Retirement Income ◽  
Retirement Plans ◽  
Full Account ◽  
Investment Performance ◽  
Management Fees ◽  
Sustainable Investment ◽  
Managed Funds

We consider whether sustainable investment can deliver performance comparable to conventional investment in investors’ long-term retirement plans. On the capital markets, sustainable investment can be achieved through various instruments and strategies, one of them being investment in mutual funds that subscribe to ESG (environmental, social, and governance) principles. First, we compare the investment performance of ESG funds with matched conventional funds over the period 1994–2020, in Europe and the U.S. We find no significant evidence of differing performance (at 5% level) despite using a number of investment performance metrics. Second, we perform a historical backtest to model a UK personal retirement plan from 2000 till 2020, taking full account of investment management fees and transaction costs. We find that investing in an index-tracker fund overlaid with ESG screening delivers a pension which is 10.4% larger than is achieved if the index-tracker fund is used without screening. This is also 20.2% larger than is achieved by investing in a collection of actively managed funds with a sustainable purpose. We conclude that an ESG-screened long-term passive investment approach for retirement plans is likely to be successful in satisfying the twin objectives of a secure retirement income and of sustainability.

DYNAMIC ASSET ALLOCATION FOR TARGET DATE FUNDS UNDER THE BENCHMARK APPROACH

2021 ◽  
pp. 1-26
Author(s):  
Jin Sun ◽  
Dan Zhu ◽  
Eckhard Platen
Keyword(s):  
Asset Allocation ◽  
Dynamic Asset Allocation ◽  
Growth Optimal Portfolio ◽  
Risky Assets ◽  
Target Date ◽  
Target Date Funds ◽  
Asset Allocations ◽  
Investment Choices ◽  
Glide Paths

ABSTRACT Target date funds (TDFs) are becoming increasingly popular investment choices among investors with long-term prospects. Examples include members of superannuation funds seeking to save for retirement at a given age. TDFs provide efficient risk exposures to a diversified range of asset classes that dynamically match the risk profile of the investment payoff as the investors age. This is often achieved by making increasingly conservative asset allocations over time as the retirement date approaches. Such dynamically evolving allocation strategies for TDFs are often referred to as glide paths. We propose a systematic approach to the design of optimal TDF glide paths implied by retirement dates and risk preferences and construct the corresponding dynamic asset allocation strategy that delivers the optimal payoffs at minimal costs. The TDF strategies we propose are dynamic portfolios consisting of units of the growth-optimal portfolio (GP) and the risk-free asset. Here, the GP is often approximated by a well-diversified index of multiple risky assets. We backtest the TDF strategies with the historical returns of the S&P500 total return index serving as the GP approximation.

scholarly journals Light a lamp and look at the stock market

2021 ◽  
Vol 7 (1) ◽  
Author(s):  
Radeef Chundakkadan
Keyword(s):  
Stock Market ◽  
Financial Distress ◽  
Investor Sentiment ◽  
Downside Risk ◽  
Bond Yields ◽  
Risky Assets ◽  
Market Participants ◽  
Market Return ◽  
The Impact

AbstractIn this study, we investigate the impact of the light-a-lamp event that occurred in India during the COVID-19 lockdown. This event happened across the country, and millions of people participated in it. We link this event to the stock market through investor sentiment and misattribution bias. We find a 9% hike in the market return on the post-event day. The effect is heterogeneous in terms of beta, downside risk, volatility, and financial distress. We also find an increase (decrease) in long-term bond yields (price), which together suggests that market participants demanded risky assets in the post-event day.

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