Author: Min Zhu
Publisher:
ISBN:
Category : Investment analysis
Languages : en
Pages : 350

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Author: Hong Liu
Publisher:
ISBN:
Category :
Languages : en
Pages : 39

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Book Description
We consider the optimal portfolio selection problem for a constant relative risk aversion (CRRA) investor who derives utility from his terminal wealth. The stock returns are predictable, but the predictive variables are only periodically observable with noise. We obtain the investor's value function in an explicit form. The theoretical results are then used to study an empirical model after calibration. We show that lack of continuous or precise observation of the predictive variables has a large impact on the optimal trading strategy. We demonstrate how information value changes with risk aversion, investment horizon, observation error volatility and other parameters. In addition, we find that although the benefit of incorporating predictability is significantly reduced due to the periodic and noisy observation, the cost of ignoring predictability is still substantial.

Author:
Publisher:
ISBN: 9789522494450
Category :
Languages : en
Pages : 132

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Author: Min Zhu
Publisher:
ISBN:
Category :
Languages : en
Pages : 34

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The inquiries to return predictability are traditionally limited to the first two moments, mean and volatility. Analogously, literature on portfolio selection also stems from a moment-based analysis with up to the fourth moment being considered. This paper develops a distribution-based framework for both return prediction and portfolio selection. More specifically, a time-varying return distribution is modeled through quantile regression and copulas, using the quantile approach to extract information in marginal distributions and copulas to capture dependence structure. A nonlinear utility function is proposed for portfolio selection which utilizes the full underlying return distribution. An empirical application to US data highlights not only the predictability of the stock and bond return distributions, but also the additional information provided by the distributional approach which cannot be captured by the traditional moment-based methods.

Author: John Y. Campbell
Publisher: OUP Oxford
ISBN: 019160691X
Category : Business & Economics
Languages : en
Pages : 272

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Book Description
Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.

Author: Pascal Gisclon
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Author: Svetlozar T. Rachev
Publisher: John Wiley & Sons
ISBN: 0471758906
Category : Business & Economics
Languages : en
Pages : 385

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Book Description
While mainstream financial theories and applications assume that asset returns are normally distributed, overwhelming empirical evidence shows otherwise. Yet many professionals don’t appreciate the highly statistical models that take this empirical evidence into consideration. Fat-Tailed and Skewed Asset Return Distributions examines this dilemma and offers readers a less technical look at how portfolio selection, risk management, and option pricing modeling should and can be undertaken when the assumption of a non-normal distribution for asset returns is violated. Topics covered in this comprehensive book include an extensive discussion of probability distributions, estimating probability distributions, portfolio selection, alternative risk measures, and much more. Fat-Tailed and Skewed Asset Return Distributions provides a bridge between the highly technical theory of statistical distributional analysis, stochastic processes, and econometrics of financial returns and real-world risk management and investments.

Author: Marcos Escobar
Publisher:
ISBN:
Category :
Languages : en
Pages : 35

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Book Description
The problem of optimal wealth allocation is solved under the assumptions that interest rates are stochastic and stock returns are predictable with observed and unobserved factors. The stock risk premium is taken to be an affine function of the predictive variables and the stock return volatility is assumed to depend on the observed factor. The latent factor is estimated based on the observations. It is shown that the stock return predictability can significantly impact the optimal bond portfolio. The welfare loss from ignoring learning can be considerable.

Author: Wayne Ferson
Publisher: MIT Press
ISBN: 0262039370
Category : Business & Economics
Languages : en
Pages : 497

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Book Description
An introduction to the theory and methods of empirical asset pricing, integrating classical foundations with recent developments. This book offers a comprehensive advanced introduction to asset pricing, the study of models for the prices and returns of various securities. The focus is empirical, emphasizing how the models relate to the data. The book offers a uniquely integrated treatment, combining classical foundations with more recent developments in the literature and relating some of the material to applications in investment management. It covers the theory of empirical asset pricing, the main empirical methods, and a range of applied topics. The book introduces the theory of empirical asset pricing through three main paradigms: mean variance analysis, stochastic discount factors, and beta pricing models. It describes empirical methods, beginning with the generalized method of moments (GMM) and viewing other methods as special cases of GMM; offers a comprehensive review of fund performance evaluation; and presents selected applied topics, including a substantial chapter on predictability in asset markets that covers predicting the level of returns, volatility and higher moments, and predicting cross-sectional differences in returns. Other chapters cover production-based asset pricing, long-run risk models, the Campbell-Shiller approximation, the debate on covariance versus characteristics, and the relation of volatility to the cross-section of stock returns. An extensive reference section captures the current state of the field. The book is intended for use by graduate students in finance and economics; it can also serve as a reference for professionals.

Author: Bradley Steele Paye
Publisher:
ISBN:
Category : Asset allocation
Languages : en
Pages : 380

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Book Description