Strategic Asset Allocation and Consumption Decisions Under Multivariate Regime Switching PDF Download
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Author: Massimo Guidolin
Publisher:
ISBN:
Category : Asset allocation
Languages : en
Pages : 33
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Author: Massimo Guidolin
Publisher:
ISBN:
Category : Asset allocation
Languages : en
Pages : 33
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Author: Allan Timmermann
Publisher:
ISBN:
Category :
Languages : en
Pages :
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This paper studies asset allocation decisions in the presence of regime switching in asset returns. We find evidence that four separate regimes - characterized as crash, slow growth, bull and recovery states - are required to capture the joint distribution of stock and bond returns. Optimal asset allocations vary considerably across these states and change over time as investors revise their estimates of the state probabilities. In the crash state, buy-and-hold investors allocate more of their portfolio to stocks the longer their investment horizon, while the optimal allocation to stocks declines as a function of the investment horizon in bull markets. The joint effects of learning about state probabilities and predictability of asset returns from the dividend yield give rise to a non-monotonic relationship between the investment horizon and the demand for stocks. Out-of-sample forecasting experiments confirm the economic importance of accounting for the presence of regimes in asset returns.
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Category :
Languages : en
Pages :
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(Uncorrected OCR) Abstract of the thesis entitled OPTIMAL ASSET ALLOCATION PROBLEMS UNDER THE DISCRETE-TIME REGIME-SWITCHING MODEL submitted by Cheung, Ka Chun for the degree of Doctor of Philosophy at The University of Hong Kong in January 2005 Recently, academics and practitioners have started paying attention to using the Markov Regime-Switching process to model asset price dynamics. The Markov Regime-Switching model can capture the reality that the investment environment is changing over time and hence is non-stationary. Another merit of the model is that it can provide a reasonable degree of analytical tractability. In this thesis, the optimal behavior of an investor in a Markov regime-switching environment will be examined. The thesis studies the optimal dynamic asset allocation strategy, the optimal consumption strategy in the presence of default risk, and the optimal surrender strategy of an equity-linked investment product. By employing the concept of stochastic dominance and assuming that the transition matrix is stochastically monotone, where both the concept and assumption have natural and appealing financial interpretations, it was shown that the optimal behavior of the investor is consistent with our intuition. As default risk is an important subject in modern finance and actuarial science, this thesis also studies the optimal portfolio problem in which financial instruments are subject to dependent default risks. Sufficient condition to order the optimal allocations was obtained. The analysis demonstrates that in the optimal portfolio problem context, the dependency structure between the default risks is essential and cannot be ignored.
Author:
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ISBN:
Category :
Languages : en
Pages : 69
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Author: Hening Liu
Publisher:
ISBN:
Category :
Languages : en
Pages : 34
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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: Donatien Hainaut
Publisher:
ISBN:
Category :
Languages : en
Pages : 19
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This paper revisits the problem of the strategic asset allocation between stocks and bonds. The novelty of our approach is to model the influence of economic cycles on the marginal distributions of asset returns and their dependence structure by a single hidden Markov chain. After a brief review of selected statistical distributions (Student't and Weibull) and copulas (elliptic and Archimedian), we describe how the switching regime model is calibrated using two indices: the CAC 40 for stocks and the SGI Bond 10 years, for bonds. We then propose a dynamic investment policy based on the estimated probabilities of sojourn in each state of the Markov chain. Even though the Markov chain ruling the assets dynamics is hidden, a Bayesian procedure can be used to infer the probabilities of being in a certain state of the economy. The asset allocation can then adapted to provide the highest yield given the most likely state. Having calibrated and estimated the parameters of the model, the performance of static and dynamic strategies are compared by conducting Monte Carlo simulations. Our results show that dynamic strategies, which exploit the additional information relating the probable regime state, perform better than static policies with a limited risk and an acceptable number of reallocations.
Author: Felix Andresen
Publisher: GRIN Verlag
ISBN: 3668486530
Category : Business & Economics
Languages : en
Pages : 107
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Master's Thesis from the year 2014 in the subject Economics - Finance, grade: 1,0, Frankfurt School of Finance & Management, language: English, abstract: The main goal of this thesis is to combine all of these concepts into a unified framework, evaluate its feasibility and performance, and to perform an analysis of the most common pitfalls and practical considerations. This unified framework uses both the MVPT and MA approach for asset allocation, but at the same time allows for dynamic and fat-tailed distributions of asset returns. It is implemented in approximately 1200 lines of efficient MATLAB code, which is publicly available at https://github.com/FelixAndresen/RSMentalAccounting. The application is programmed in a way that it is readily expandable to a larger number of assets and other investment approaches. The framework is also independent on the choice of assets, which is why the choice of assets for the illustration of the thesis findings was based on the availability of data. The thesis is structured as follows. Chapter 2 reviews the current literature and theoretical concepts. More specifically, Chapter 2.1 introduces the Mental Accounting framework and the connections and differences to Markowitz’s Mean Variance Portfolio Theory. In Chapter 2.2 the most important concepts of dynamic investment management and stochastic programming are introduced. Chapter 2.3 discusses the regime switching models used to generate scenarios for the stochastic programming approach and the important topic of model selection. Chapter 2.4 gives an overview of Gaussian Mixture Models which present a tool to create the expected distribution used to optimize the asset allocation. In Chapter 3 all the pieces from the theoretical parts are brought together to formulate the dynamic programming models and the hypotheses to be tested in the thesis. The market data used to carry out the analysis is discussed in Chapter 4, as well as some necessary methodology on how to calculate, aggregate and interpret asset returns. Chapter 5 presents exemplary and illustrative results, and discusses the strengths and weaknesses of the MVPT and MA investment approaches. The thesis closes with a summary and conclusion in Chapter 6.
Author: Panagiotis Andrikopoulos
Publisher: Academic Press
ISBN: 0128094915
Category : Business & Economics
Languages : en
Pages : 428
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Handbook of Frontier Markets: Evidence from Asia and International Comparative Studies provides novel insights from academic perspectives about the behavior of investors and prices in several frontier markets. It explores finance issues usually reserved for developed and emerging markets in order to gauge whether these issues are relevant and how they manifest themselves in frontier markets. Frontier markets have now become a popular investment class among institutional investors internationally, with major financial services providers establishing index-benchmarks for this market-category. The anticipation for frontier markets is optimistic uncertainty, and many people believe that, given their growth rates, these markets will be economic success stories. Irrespective of their degrees of success, The Handbook of Frontier Markets can help ensure that the increasing international investment diverted to them will aid in their greater integration within the global financial system. Presents topics in the contexts of frontier markets and uses tests based on established methodologies from finance research Features contributing authors who are established university academics Emphasizes financial institutions and applications of financial risk models Explores finance issues usually reserved for developed and emerging markets in order to gauge whether these issues are relevant and how they manifest themselves in frontier markets
Author: Alan O'Sullivan
Publisher:
ISBN:
Category : Business Theses
Languages : en
Pages : 0
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