Cryptocurrencies and portfolio diversification in an emerging market

PurposeThis paper examines the effect of cryptocurrencies on the portfolio risk-adjusted returns of traditional and alternative investments within an emerging market economy.Design/methodology/approachThe paper employs daily arithmetic returns from August 2015 to October 2018 of traditional assets (stocks, bonds, currencies), alternative assets (commodities, real estate) and cryptocurrencies. Using the mean-variance analysis, the Sharpe ratio, the conditional value-at-risk and the mean-variance spanning tests.FindingsThe paper documents evidence to support the diversification benefits of cryptocurrencies by utilising the mean-variance tests, improving the efficient frontier and the risk-adjusted returns of the emerging market economy portfolio of investments.Practical implicationsThis paper firmly broadens the Modern Portfolio Theory by authenticating cryptocurrencies as assets with diversification benefits in an emerging market economy investment portfolio.Originality/valueAs far as the authors are concerned, this paper presents the first evidence of the effect of diversification benefits of cryptocurrencies on emerging market asset portfolios constructed using traditional and alternative assets.

Time-Discrete Hedging of Down-and-Out Puts with Overnight Trading Gaps

Hedging down-and-out puts (and up-and-out calls), where the maximum payoff is reached just before a barrier is hit that would render the claim worthless afterwards, is challenging. All hedging methods potentially lead to large errors when the underlying is already close to the barrier and the hedge portfolio can only be adjusted in discrete time intervals. In this paper, we analyze this hedging situation, especially the case of overnight trading gaps. We show how a position in a short-term vanilla call option can be used for efficient hedging. Using a mean-variance hedging approach, we calculate optimal hedge ratios for both the underlying and call options as hedge instruments. We derive semi-analytical formulas for optimal hedge ratios in a Black–Scholes setting for continuous trading (as a benchmark) and in the case of trading gaps. For more complex models, we show in a numerical study that the semi-analytical formulas can be used as a sufficient approximation, even when stochastic volatility and jumps are present.

A new behavioral finance mean variance framework

PurposeThe author proposes an update to the mean variance (MV) framework that replaces a constant risk aversion parameter using a dynamic risk aversion indicator. The contribution to the literature is made through making the static risk aversion parameter operational using an indicator of market sentiment. Results suggest that Sharpe ratios improve when the author replaces the traditional risk aversion parameter with a dynamic sentiment indicator from the behavioral finance literature when allocating between a risky portfolio and a risk-free asset. However, results are mixed when using the behavioral framework to allocate between two risky assets.Design/methodology/approachThe author includes a dynamic risk aversion parameter in the mean variance framework and back test using the traditional and updated behavioral mean variance (BMV) framework to see which framework leads to better performance.FindingsThe author finds that the behavioral framework provides superior performance when allocating between a risky and risk-free asset; however, it under performs when allocating between risky assets.Research limitations/implicationsThe research is based on back testing; therefore, it cannot be concluded that this strategy will perform well in real-time circumstances.Practical implicationsPortfolio managers may use this strategy to optimize the allocation between a risky portfolio and a risk-free asset.Social implicationsAn improved allocation between risk-free and risky assets that could lead to less leverage in the market.Originality/valueThe study is the first to use such a sentiment indicator in the traditional MV framework and show the math.

Sourcing decision under interconnected risks: an application of mean–variance preferences approach

Supply chains are customarily associated with multiple interconnected risks originated from supply side, demand side, or from the unanticipated background uncertainties faced by a firm. Also, effective functioning of supply chain hinges on sourcing decisions of inputs (raw materials). Therefore, there is a striking need to analyse the risk preference of the decision maker while going for optimal sourcing decision under varying degree of interconnected supply chain risks. This study addresses this issue by analysing the comparative static effects under interconnected supply chain risks for a risk averse decision-maker, manufacturing and selling products in a regulated market under perfect competition. The decision-maker faces not only supply-side risk (due to random input material prices) but also interconnected risks arising out of background risk (setup costs risk) and demand-side risk (output prices risk). With preferences defined over the mean and standard deviation of the uncertain final profit, this study illustrates the effects of the changes in the pairwise correlations between the three above mentioned risks on the optimum input choice of the manufacturer. To contextualise this study, an India-based generic drug manufacturer cum seller has been considered as a case in the parametric example of our model. Adaptation of the mean–variance framework helps obtaining all the results in terms of the relative trade-off between risk and return, with simple yet intuitive interpretations.

Validating A Smartphone-Based Biomarker Tool Lyfas in Screening Anxiety Disorders

Lyfas is a smartphone-based biomedical application that captures the cardiovascular autonomic biomarkers (CVb), surrogating for mental health attributes. SD1/SD2 biomarker assesses the sympathovagal balance and is considered to be a potential indicator of Lyfas anxiety score (LAS). A total of 1837 males and 973 females took Lyfas (hypersensitivity-checked) and Hamilton Anxiety Rating Scale (HAM-A) self-scoring tests. LAS has been statistically validated by Linear regressions, one-way ANOVA, t-stat, correlations (r), and Bland Altman agreement assessment with respect to HAM-A. Sensitivity, specificity, precision, accuracy, Fscore, and Youden’s index (j-stat) are computed. Results show that (i) Lyfas is not a very hypersensitive instrument (mean-variance is 0.6). (ii) It can predict HAM-A with 94.7% accuracy (R2) and is a statistically significant model (p <0.05). (iii) LAS and HAM-A are positively correlated by 97%, the t-stat value of 5.38 for the population indicates that the two instruments have a significant mean difference. (iv) Bland Altman test showcases the overall agreement of 12.95% due to different modes and scales of measurements. (v) on average, LAS is 87.78% accurate, 86.82% precise, and its’ 65.2% j-stat value proves that Lyfas is a novel industry-standard smartphone biomarker application that can be used to accurately screen anxiety disorders.

Divergent Abiotic Stressors Drive Grassland Community Assembly of Tibet and Mongolia Plateau

Multiple ecological processes simultaneously govern community assembly, but it remains unclear how abiotic stressors regulate the relative importance of these processes among different biogeographic regions. Therefore, we conducted a comprehensive study on the responses of community assembly to varying environmental gradients, using the mean, variance, skewness, and kurtosis of plant height (height), specific leaf area (SLA) and leaf dry matter content (LDMC) distributions on the Tibetan Plateau (TP) and the Mongolian Plateau (MP). Our results showed that the prevalence of trait convergence across all grasslands in both TP and MP seem to be the result of abiotic filtering or weaker competitive exclusion etc. These trait-convergence assembly processes decrease the functional dispersion but increase the evenness of the trait frequency distribution. The mean, variance, skewness, and kurtosis responses of grassland communities to abiotic stress varied between the TP and MP. On average, plant trait distribution was mainly driven by temperature on the TP, and low-temperature stress altered the community assembly rules. In contrast, water availability shaped plant trait frequency distributions on the MP, and drought stress mediated the balance between different assembly processes. Our results provide empirical evidence that divergent abiotic stressors regulate the grassland community assembly on the TP and MP. Together, our study speculates that different aspects of future climate change, such as climate warming and changing precipitation patterns, on community assembly are dependent on regional climatic regimes.