Portfolio Diversification and Performance of Deposit Money Banks: Analysing the Nigerian Banking Industry

The focus is on Portfolio Diversification and Performance of Deposit Money Banks: analyzing the Nigerian banking industry for the period 1990-2019. The study measured treasury bills, ordinary shares, investments in subsidiaries, and foreign investments outside Nigeria as proxies for Portfolio Diversification while Return on Equity as proxy for performance of deposit money banks for the periods under review. In the course of the study, data were obtained from the website of Central Bank Statistical bulletin and annual report of Nigerian Deposit Insurance Corporation (NDIC). The Augmented Dickey Fuller (ADF) test option was used to test for unit roots. The ARDL and Bounds test were used to estimate the short and long run relationships respectively. The study discovered that at short run, treasury bills, and ordinary shares are negatively related and not significantly related to return on equity while investments in subsidiaries and foreign balances outside Nigeria are positively related to return on equity of DMBs at most lag periods. However, it was further observed that at different lag periods the variables do not significantly predict the direction of return on equity of DMBs. Long run relationship was also observed to exist amid treasury bills, acquisition of ordinary shares, investment in subsidiaries, ,foreign investments outside Nigeria and performance of all deposit money banks in Nigeria for the period 1990 – 2019.at short run, DMBs should diversify into investments in subsidiaries , as this would improve return on equity. Deposit Money Banks should also diversify into foreign holdings that would yield positive net present values. Deposit money Banks in Nigeria should diversify into foreign investments with the right mix that would increase performance. These were some of the recommendations proffered, to the Government, monetary authorities, Central Bank of Nigeria, researchers and Deposit Money Banks in Nigeria.

Portfolio performance under tracking error and benchmark volatility constraints

Purpose Using a portfolio comprising liquid global stocks and bonds, this study aims to limit absolute risk to that of a standardised benchmark and determine whether this has a significant impact on expected return in both high volatility period (HV) and low volatility period (LV). Design/methodology/approach Using a traditional benchmark comprising 40% equity and 60% bonds, a constant tracking error (TE) frontier was constructed and implemented. Portfolio performance for different TE constraints and different economic periods (expansion and contraction) was explored. Findings Results indicate that during HV, replicating benchmark portfolio risk produces portfolios that outperform both the maximum return (MR) portfolio and the benchmark. MR portfolios outperform those with the same risk as that of the benchmark in LV. The MR portfolio weights assets to obtain the highest return on the TE frontier. During HV, the benchmark replicated risk portfolio obtained a higher absolute risk value than that of the MR portfolio because of an inefficient benchmark. In HV, the benchmark replicated risk portfolio favoured intermediate maturity treasury bills. Originality/value There is a dearth of literature exploring the performance of active portfolios subject to TE constraints. This work addresses this gap and demonstrates, for the first time, the relative portfolio performance of several standard portfolio choices on the frontier.

A Markov-Switching VSTOXX Trading Algorithm for Enhancing EUR Stock Portfolio Performance

In the present paper, we test the benefit of using Markov-Switching models and volatility futures diversification in a Euro-based stock portfolio. With weekly data of the Eurostoxx 50 (ESTOXX50) stock index, we forecasted the smoothed regime-specific probabilities at T + 1 and used them as the weighting method of a diversified portfolio in ESTOXX50 and ESTOSS50 volatility index (VSTOXX) futures. With the estimated smoothed probabilities from 9 July 2009 to 29 September 2020, we simulated the performance of three theoretical investors who paid different trading costs and invested in ESTOXX50 during calm periods (low volatility regime) or VSTOXX futures and the three-month German treasury bills in distressed or highly distressed periods (high and extreme volatility regimes). Our results suggest that diversification benefits hold in the short-term, but if a given investor manages a two-asset portfolio with ESTOXX50 and our simulated portfolios, the stock portfolio’s performance is enhanced significantly, in the long term, with the presence of trading costs. These results are of use to practitioners for algorithmic and active trading applications in ESTOXX50 ETFs and VSTOXX futures.

A Comparative Analysis of Parsimonious Yield Curve Models with Focus on the Nelson-Siegel, Svensson and Bliss Versions

We shed light on computational challenges when fitting the Nelson-Siegel, Bliss and Svensson parsimonious yield curve models to observed US Treasury securities with maturities up to 30 years. As model parameters have a specific financial meaning, the stability of their estimated values over time becomes relevant when their dynamic behavior is interpreted in risk-return models. Our study is the first in the literature that compares the stability of estimated model parameters among different parsimonious models and for different approaches for predefining initial parameter values. We find that the Nelson-Siegel parameter estimates are more stable and conserve their intrinsic economical interpretation. Results reveal in addition the patterns of confounding effects in the Svensson model. To obtain the most stable and intuitive parameter estimates over time, we recommend the use of the Nelson-Siegel model by taking initial parameter values derived from the observed yields. The implications of excluding Treasury bills, constraining parameters and reducing clusters across time to maturity are also investigated.

MONEY MARKET INSTRUMENTS AND ECONOMIC GROWTH OF NIGERIA

This study investigated the relationship between the money market instruments and economic growth of Nigeria using time series analysis from 1981-2019. The relevant variables for which data were sourced include: Real gross domestic product, Financial deepening indicator [ratio of money supply (M2) to gross domestic product – (M2/GDP)(%)], value of treasury bills outstanding, value of Certificate of deposit outstanding, value of commercial paper outstanding, and value of banker acceptance outstanding. The data extracted from the CBN statistical bulletin, vol. 30, 2019. The Augmented Dickey Fuller (ADF), Johansen cointegration test and Error Correction Mechanism (ECM) were adopted. The research findings found that, there is significant relationship between money market instruments and economic growth in Nigeria. Furthermore, there is insignificant relationship between money market instruments and the development of the Nigerian financial system. The study recommends amongst others, the need for Government to create appropriate macroeconomic policies, legal framework and consolidate and improve on reforms with a holistic view to developing and deepening the market so as to promote productive activities, investments, and ultimately economic growth. JEL: E41; E50; E51 <p> </p><p><strong> Article visualizations:</strong></p><p><img src="/-counters-/edu_01/0798/a.php" alt="Hit counter" /></p>