Global equity risk factors that are constructed by sorting stocks on firm characteristics associated with expected returns contain embedded region and sector exposures. We show that these positions lead to uncompensated volatility. Hedging out both region and sector exposures simultaneously increases the Sharpe ratio of the typical global factor by 50%. Hedged factors, individually or in a model, always subsume their non-hedged counterparts. Our results have implications for international asset pricing and portfolio management.
{"title":"Compensated and Uncompensated Risks In Global Factor Investing","authors":"Sina Ehsani, Michael R. Hunstad, Manan Mehta","doi":"10.2139/ssrn.3631222","DOIUrl":"https://doi.org/10.2139/ssrn.3631222","url":null,"abstract":"Global equity risk factors that are constructed by sorting stocks on firm characteristics associated with expected returns contain embedded region and sector exposures. We show that these positions lead to uncompensated volatility. Hedging out both region and sector exposures simultaneously increases the Sharpe ratio of the typical global factor by 50%. Hedged factors, individually or in a model, always subsume their non-hedged counterparts. Our results have implications for international asset pricing and portfolio management.","PeriodicalId":377322,"journal":{"name":"Investments eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-06-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115802208","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Gianluca Fusai, D. Mignacca, A. Nardon, Benjamin Human
The aim of this paper is to shed new light on the concept of diversification showing that it is not necessarily related to the reduction of the volatility of a portfolio, as it is commonly perceived. We introduce a diversification index that exploits the decomposition of portfolio volatility into undiversified volatility and a diversification component. The diversification component offsets the undiversified part leaving as a final result the portfolio volatility itself. Our decomposition has a clear statistical interpretation because it relates the diversification component to the so-called partial covariances, i.e. the covariances between the residuals of the regressions of the weighted asset returns with respect to the portfolio return. On this basis, we advocate the construction of an equally diversified portfolio versus an equally weighted portfolio. An empirical analysis illustrates the superior performance of the equally diversified portfolios with respect to the equally weighted portfolio.
{"title":"Equally Diversified or Equally Weighted?","authors":"Gianluca Fusai, D. Mignacca, A. Nardon, Benjamin Human","doi":"10.2139/ssrn.3628585","DOIUrl":"https://doi.org/10.2139/ssrn.3628585","url":null,"abstract":"The aim of this paper is to shed new light on the concept of diversification showing that it is not necessarily related to the reduction of the volatility of a portfolio, as it is commonly perceived. We introduce a diversification index that exploits the decomposition of portfolio volatility into undiversified volatility and a diversification component. The diversification component offsets the undiversified part leaving as a final result the portfolio volatility itself. Our decomposition has a clear statistical interpretation because it relates the diversification component to the so-called partial covariances, i.e. the covariances between the residuals of the regressions of the weighted asset returns with respect to the portfolio return. On this basis, we advocate the construction of an equally diversified portfolio versus an equally weighted portfolio. An empirical analysis illustrates the superior performance of the equally diversified portfolios with respect to the equally weighted portfolio.","PeriodicalId":377322,"journal":{"name":"Investments eJournal","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-06-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124858895","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We propose option-implied measures of conditional asymmetry based upon quantiles and expectiles inferred from weekly options. All quantities are by construction forward looking and estimated non-parametrically through a novel arbitrage-free natural smoothing spline technique that produces quick to estimate volatility smiles. We find that option implied asymmetry indicators exhibit short, medium and long-term predictive ability for the U.S. equity risk premium and market volatility, both in- and out-of-sample, and outperform equal indicators inferred from historical returns.
{"title":"The Forecasting Power of Short-term Options","authors":"Arthur Böök, Carlo Sala","doi":"10.2139/ssrn.3622433","DOIUrl":"https://doi.org/10.2139/ssrn.3622433","url":null,"abstract":"We propose option-implied measures of conditional asymmetry based upon quantiles and expectiles inferred from weekly options. All quantities are by construction forward looking and estimated non-parametrically through a novel arbitrage-free natural smoothing spline technique that produces quick to estimate volatility smiles. We find that option implied asymmetry indicators exhibit short, medium and long-term predictive ability for the U.S. equity risk premium and market volatility, both in- and out-of-sample, and outperform equal indicators inferred from historical returns.","PeriodicalId":377322,"journal":{"name":"Investments eJournal","volume":"30 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-06-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126749576","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we wish to examine how prospects of unemployment might change predictions of consumption based CAPM with regards to equity premium and term structure of interest. In particular, instead of agents having varied consumption growth, we study agents with probability of losing significant portion of their consumption. Thus, volatility of unemployment determines risk in the economy, rather than volatility of the consumption. Within framework of Epstein-Zin utility function, our model correctly predicts term structure premium and equity premium. In particular, the model predicts one-year risk-free rate of 1.71%, 30-year risk-free rate of 3.17% and equity rate of 7.33% given parameter of risk aversion of 1,2, EIS of 1,54, and time discount factor of 0.9578. Additionally, we study importance of third moments in our model and discover new pricing factor that is missing in current skewness models. Empirical tests under various conditions confirm statistical significance of our factor. Finally, we utilize our model to predict market changes based on shifts in term structure and then empirically verify model predictions. This paper demonstrates that standard C-based CAPM is more than enough to predict observed term structure and equity premium and no model modification is required if proper consumption variation statistics is used.
{"title":"Unemployment-based Capital Asset Pricing Model","authors":"Mikhail Kindrat","doi":"10.2139/ssrn.3620806","DOIUrl":"https://doi.org/10.2139/ssrn.3620806","url":null,"abstract":"In this paper, we wish to examine how prospects of unemployment might change predictions of consumption based CAPM with regards to equity premium and term structure of interest. In particular, instead of agents having varied consumption growth, we study agents with probability of losing significant portion of their consumption. Thus, volatility of unemployment determines risk in the economy, rather than volatility of the consumption. Within framework of Epstein-Zin utility function, our model correctly predicts term structure premium and equity premium. In particular, the model predicts one-year risk-free rate of 1.71%, 30-year risk-free rate of 3.17% and equity rate of 7.33% given parameter of risk aversion of 1,2, EIS of 1,54, and time discount factor of 0.9578. Additionally, we study importance of third moments in our model and discover new pricing factor that is missing in current skewness models. Empirical tests under various conditions confirm statistical significance of our factor. Finally, we utilize our model to predict market changes based on shifts in term structure and then empirically verify model predictions. This paper demonstrates that standard C-based CAPM is more than enough to predict observed term structure and equity premium and no model modification is required if proper consumption variation statistics is used.","PeriodicalId":377322,"journal":{"name":"Investments eJournal","volume":"38 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-06-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133318726","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Two-degrees alignment has become a major issue for climate-aware portfolio management. There are sophisticated initiatives aiming to predict corporate emission intensities from 2030 up to 2100. In this paper, we focus on the significance of the ‘current policy scenario’, where corporates would simply stay on their current trajectories for their emission intensities. UNEP has illustrated how far the global current policy scenario is from a global two-degrees scenario. We want to understand this ‘current policy scenario’, broken down asset-by-asset within the significant emission sectors, and from a global index point of view. We will address choices of emission intensity metrics and of weighting schemes. Enabling the low-carbon transition while maintaining a long-term focus in investment decision-making is a relevant approach. In this paper, we intend to illustrate the virtue of the long-term choice with a simple three-year observation gap in the power generation sector’s intensities. To complement our ‘current policy’, which focuses on the emissions track-record of firms, we illustrate a mosaic theory approach to quantifying the intentionality of a firm to green itself. Anticipating positive impacts requires that investors have identified their key questions for firms' intentions.
{"title":"Trajectory Monitoring in Portfolio Management and Issuer Intentionality Scoring","authors":"Théo Le Guenedal, Julien Girault, Mathieu Jouanneau, Frédéric Lepetit, Takaya Sekine","doi":"10.2139/ssrn.3630302","DOIUrl":"https://doi.org/10.2139/ssrn.3630302","url":null,"abstract":"Two-degrees alignment has become a major issue for climate-aware portfolio management. There are sophisticated initiatives aiming to predict corporate emission intensities from 2030 up to 2100. In this paper, we focus on the significance of the ‘current policy scenario’, where corporates would simply stay on their current trajectories for their emission intensities. UNEP has illustrated how far the global current policy scenario is from a global two-degrees scenario. We want to understand this ‘current policy scenario’, broken down asset-by-asset within the significant emission sectors, and from a global index point of view. We will address choices of emission intensity metrics and of weighting schemes. Enabling the low-carbon transition while maintaining a long-term focus in investment decision-making is a relevant approach. In this paper, we intend to illustrate the virtue of the long-term choice with a simple three-year observation gap in the power generation sector’s intensities. To complement our ‘current policy’, which focuses on the emissions track-record of firms, we illustrate a mosaic theory approach to quantifying the intentionality of a firm to green itself. Anticipating positive impacts requires that investors have identified their key questions for firms' intentions.","PeriodicalId":377322,"journal":{"name":"Investments eJournal","volume":"38 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132919375","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract This paper examines the impact of cyber risks on ventures’ initial coin offerings (ICOs) results. We match novel data on national cybersecurity with hand collected characteristics of 1,654 ICO projects and discover that cyber risks are negatively associated ICO success. We further find that institutional quality, such as the protection of investor rights and the function of the legal system, attenuates this relationship.
{"title":"Cyber Risks and Initial Coin Offerings: Evidence from the World","authors":"Jiafu An, Tinghua Duan, W. Hou, Xianda Liu","doi":"10.2139/ssrn.3604158","DOIUrl":"https://doi.org/10.2139/ssrn.3604158","url":null,"abstract":"Abstract This paper examines the impact of cyber risks on ventures’ initial coin offerings (ICOs) results. We match novel data on national cybersecurity with hand collected characteristics of 1,654 ICO projects and discover that cyber risks are negatively associated ICO success. We further find that institutional quality, such as the protection of investor rights and the function of the legal system, attenuates this relationship.","PeriodicalId":377322,"journal":{"name":"Investments eJournal","volume":"128 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128127278","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We construct synthetic, tradable risk factors using optimal combinations of large and liquid mutual funds and ETFs. We find that investors are not able to harvest the unconditional factor risk premia, although the synthetic portfolios of institutional investors outperform those of retail investors. We also propose a methodology to identify market funds. Lastly, we show that (i) daily flows to naive smart beta strategies are more predictable than those to our synthetic strategies, and (ii) our synthetic HML outperforms a naive one based on fund names. Our results have implications for the evaluations of portfolio managers and cross-sectional return anomalies.
{"title":"Smart Beta Made Smart: Synthetic Risk Factors for Institutional and Retail Investors","authors":"Andreas Johansson, Riccardo Sabbatucci, A. Tamoni","doi":"10.2139/ssrn.3594064","DOIUrl":"https://doi.org/10.2139/ssrn.3594064","url":null,"abstract":"We construct synthetic, tradable risk factors using optimal combinations of large and liquid mutual funds and ETFs. We find that investors are not able to harvest the unconditional factor risk premia, although the synthetic portfolios of institutional investors outperform those of retail investors. We also propose a methodology to identify market funds. Lastly, we show that (i) daily flows to naive smart beta strategies are more predictable than those to our synthetic strategies, and (ii) our synthetic HML outperforms a naive one based on fund names. Our results have implications for the evaluations of portfolio managers and cross-sectional return anomalies.","PeriodicalId":377322,"journal":{"name":"Investments eJournal","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127663445","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Investors tend to litigate large stock price declines, i.e., file “stock-drop lawsuits”. Enterprising plaintiffs’ attorneys seek to take advantage of the stock market declines that have accompanied the COVID-19 outbreak in early 2020 by filing class action lawsuits. However, it is less clear whether the ex-ante threat of security class actions can deter stock price crashes. To address this question, we exploit the 1999 ruling of the Ninth Circuit Court of Appeals that discourages security class actions as a quasi-exogenous shock, and find that reducing the threat of security class actions leads to a significant increase in stock price crash risk. This effect is more pronounced for firms faced with higher litigation risk, with worse earnings quality and weaker monitoring from auditors, and is partially driven by decreased timeliness of bad-news disclosure. Our overall findings highlight the importance of security class actions in constraining bad-news hoarding and maintaining market stability.
{"title":"Litigating Crashes? Insights from Security Class Actions","authors":"Huili Zhang, Xiaoran Ni, Qi Jin","doi":"10.2139/ssrn.3591634","DOIUrl":"https://doi.org/10.2139/ssrn.3591634","url":null,"abstract":"Investors tend to litigate large stock price declines, i.e., file “stock-drop lawsuits”. Enterprising plaintiffs’ attorneys seek to take advantage of the stock market declines that have accompanied the COVID-19 outbreak in early 2020 by filing class action lawsuits. However, it is less clear whether the ex-ante threat of security class actions can deter stock price crashes. To address this question, we exploit the 1999 ruling of the Ninth Circuit Court of Appeals that discourages security class actions as a quasi-exogenous shock, and find that reducing the threat of security class actions leads to a significant increase in stock price crash risk. This effect is more pronounced for firms faced with higher litigation risk, with worse earnings quality and weaker monitoring from auditors, and is partially driven by decreased timeliness of bad-news disclosure. Our overall findings highlight the importance of security class actions in constraining bad-news hoarding and maintaining market stability.","PeriodicalId":377322,"journal":{"name":"Investments eJournal","volume":"55 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128504176","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper presents an N-player Tullock contest where players purchases shares in a lottery at a fixed common cost. Once all players have purchased their shares, a common value reward is raffled off. The model has some similarities to all-pay auctions, however the assignment mechanism differs. This difference ensures that, unlike all-pay auctions, the N-player Tullock contest has an unique pure strategy Nash equilibrium. This article presents also a new kind of Tullock contest that integrates the main mechanism behind proof-of-work mining of cryptocurrencies such as Bitcoin. The application of the model is expanded to analyze some topics of proof-of-work protocols, such as concentration of hashing power, double-spending attacks and environmental externalities.
{"title":"Tullock Contest: A Model of Proof-of-Work Mining in Cryptocurrencies","authors":"Jorge Soria","doi":"10.2139/ssrn.3561146","DOIUrl":"https://doi.org/10.2139/ssrn.3561146","url":null,"abstract":"This paper presents an N-player Tullock contest where players purchases shares in a lottery at a fixed common cost. Once all players have purchased their shares, a common value reward is raffled off. The model has some similarities to all-pay auctions, however the assignment mechanism differs. This difference ensures that, unlike all-pay auctions, the N-player Tullock contest has an unique pure strategy Nash equilibrium. \u0000 \u0000This article presents also a new kind of Tullock contest that integrates the main mechanism behind proof-of-work mining of cryptocurrencies such as Bitcoin. The application of the model is expanded to analyze some topics of proof-of-work protocols, such as concentration of hashing power, double-spending attacks and environmental externalities.","PeriodicalId":377322,"journal":{"name":"Investments eJournal","volume":"240 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123026195","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper attempts to investigate the effects of Coronavirus spread on stock markets Coronavirus spread has been measured by cumulative cases, new cases, cumu
本文试图探讨冠状病毒传播对股票市场的影响冠状病毒传播已通过累积病例，新病例，cumu来衡量
{"title":"The Effect of Coronavirus Spread on Stock Markets: The Case of the Worst 6 Countries","authors":"N. Alber","doi":"10.2139/ssrn.3578080","DOIUrl":"https://doi.org/10.2139/ssrn.3578080","url":null,"abstract":"This paper attempts to investigate the effects of Coronavirus spread on stock markets Coronavirus spread has been measured by cumulative cases, new cases, cumu","PeriodicalId":377322,"journal":{"name":"Investments eJournal","volume":"142 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122800814","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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