Pub Date : 2021-06-18DOI: 10.1142/s2010495221500147
Alex Garivaltis
I juxtapose Cover’s vaunted universal portfolio selection algorithm ([Cover, TM (1991). Universal portfolios. Mathematical Finance, 1, 1–29]) with the modern representation of a portfolio as a certain allocation of risk among the available assets, rather than a mere allocation of capital. Thus, I define a Universal Risk Budgeting scheme that weights each risk budget, instead of each capital budget, by its historical performance record, á la Cover. I prove that my scheme is mathematically equivalent to a novel type of [Cover, TM and E Ordentlich (1996). Universal portfolios with side information. IEEE Transactions on Information Theory, 42, 348–363] universal portfolio that uses a new family of prior densities that have hitherto not appeared in the literature on universal portfolio theory. I argue that my universal risk budget, so-defined, is a potentially more perspicuous and flexible type of universal portfolio; it allows the algorithmic trader to incorporate, with advantage, his prior knowledge or beliefs about the particular covariance structure of instantaneous asset returns. Say, if there is some dispersion in the volatilities of the available assets, then the uniform or Dirichlet priors that are standard in the literature will generate a dangerously lopsided prior distribution over the possible risk budgets. In the author’s opinion, the proposed “Garivaltis prior” makes for a nice improvement on Cover’s timeless expert system, that is properly agnostic and open to different risk budgets from the very get-go. Inspired by [Jamshidian, F (1992). Asymptotically optimal portfolios. Mathematical Finance, 2, 131–150], the universal risk budget is formulated as a new kind of exotic option in the continuous time Black–Scholes market, with all the pleasure, elegance, and convenience that entails.
{"title":"UNIVERSAL RISK BUDGETING","authors":"Alex Garivaltis","doi":"10.1142/s2010495221500147","DOIUrl":"https://doi.org/10.1142/s2010495221500147","url":null,"abstract":"I juxtapose Cover’s vaunted universal portfolio selection algorithm ([Cover, TM (1991). Universal portfolios. Mathematical Finance, 1, 1–29]) with the modern representation of a portfolio as a certain allocation of risk among the available assets, rather than a mere allocation of capital. Thus, I define a Universal Risk Budgeting scheme that weights each risk budget, instead of each capital budget, by its historical performance record, á la Cover. I prove that my scheme is mathematically equivalent to a novel type of [Cover, TM and E Ordentlich (1996). Universal portfolios with side information. IEEE Transactions on Information Theory, 42, 348–363] universal portfolio that uses a new family of prior densities that have hitherto not appeared in the literature on universal portfolio theory. I argue that my universal risk budget, so-defined, is a potentially more perspicuous and flexible type of universal portfolio; it allows the algorithmic trader to incorporate, with advantage, his prior knowledge or beliefs about the particular covariance structure of instantaneous asset returns. Say, if there is some dispersion in the volatilities of the available assets, then the uniform or Dirichlet priors that are standard in the literature will generate a dangerously lopsided prior distribution over the possible risk budgets. In the author’s opinion, the proposed “Garivaltis prior” makes for a nice improvement on Cover’s timeless expert system, that is properly agnostic and open to different risk budgets from the very get-go. Inspired by [Jamshidian, F (1992). Asymptotically optimal portfolios. Mathematical Finance, 2, 131–150], the universal risk budget is formulated as a new kind of exotic option in the continuous time Black–Scholes market, with all the pleasure, elegance, and convenience that entails.","PeriodicalId":43570,"journal":{"name":"Annals of Financial Economics","volume":" ","pages":""},"PeriodicalIF":2.0,"publicationDate":"2021-06-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42705251","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}
Pub Date : 2021-06-01DOI: 10.1142/S2010495221500081
Sisa Shiba, Rangan Gupta
This paper aims to examine the predictive power of the daily newspaper-based index uncertainty related to infectious diseases (EMVID) for the US Treasury securities’ realized volatility (RV) using the heterogonous autoregressive volatility (HAV-RV) model. In our out-of-sample forecast, we find strong significant evidence on the role of the EMVID index in forecasting the volatility of the US Treasury securities in the short-, medium- and long-run horizons except for the US 2-Year Treasury-Note (T-Note) Futures. Assessing the EMVID index role during the COVID-19 episode, we find that even in this short period, the index role in predicting the US Treasury securities is highly significant. These findings have important implications for portfolio managers and investors in times of unprecedented levels of uncertainty resulting from epidemic and pandemic diseases.
{"title":"UNCERTAINTY RELATED TO INFECTIOUS DISEASES AND FORECASTABILITY OF THE REALIZED VOLATILITY OF US TREASURY SECURITIES","authors":"Sisa Shiba, Rangan Gupta","doi":"10.1142/S2010495221500081","DOIUrl":"https://doi.org/10.1142/S2010495221500081","url":null,"abstract":"This paper aims to examine the predictive power of the daily newspaper-based index uncertainty related to infectious diseases (EMVID) for the US Treasury securities’ realized volatility (RV) using the heterogonous autoregressive volatility (HAV-RV) model. In our out-of-sample forecast, we find strong significant evidence on the role of the EMVID index in forecasting the volatility of the US Treasury securities in the short-, medium- and long-run horizons except for the US 2-Year Treasury-Note (T-Note) Futures. Assessing the EMVID index role during the COVID-19 episode, we find that even in this short period, the index role in predicting the US Treasury securities is highly significant. These findings have important implications for portfolio managers and investors in times of unprecedented levels of uncertainty resulting from epidemic and pandemic diseases.","PeriodicalId":43570,"journal":{"name":"Annals of Financial Economics","volume":" ","pages":""},"PeriodicalIF":2.0,"publicationDate":"2021-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49577009","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}
Pub Date : 2021-04-19DOI: 10.1142/S2010495221500032
Moawia Alghalith
Assuming a stochastic interest rate, we introduce a simple formula for pricing European options. In doing so, we provide a complete closed-form formula that does not require any numerical/computational methods. Furthermore, the model and formula are far simpler than the previous models/formulas. Our formula is as simple as the classical Black–Scholes pricing formula. Moreover, it removes the theoretical limitation of the original Black–Scholes model without any added practical complexity.
{"title":"PRICING OPTIONS UNDER STOCHASTIC INTEREST RATE AND THE FRASCA–FARINA PROCESS: A SIMPLE, EXPLICIT FORMULA","authors":"Moawia Alghalith","doi":"10.1142/S2010495221500032","DOIUrl":"https://doi.org/10.1142/S2010495221500032","url":null,"abstract":"Assuming a stochastic interest rate, we introduce a simple formula for pricing European options. In doing so, we provide a complete closed-form formula that does not require any numerical/computational methods. Furthermore, the model and formula are far simpler than the previous models/formulas. Our formula is as simple as the classical Black–Scholes pricing formula. Moreover, it removes the theoretical limitation of the original Black–Scholes model without any added practical complexity.","PeriodicalId":43570,"journal":{"name":"Annals of Financial Economics","volume":"1 1","pages":"2150003"},"PeriodicalIF":2.0,"publicationDate":"2021-04-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48390554","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}
Pub Date : 2021-04-07DOI: 10.1142/S2010495221500019
Vu Huu Thanh, Nguyen Minh Ha, M. McAleer
This paper explores the structural relationship among asset investment diversification, business diversification and the bankruptcy risk of firms. Asset investment diversification is divided into two components, namely related and unrelated asset investment diversification, while business diversification includes related and unrelated business diversification. In the hypothetical relationship, business diversification is proposed to play a mediating role to explain the effect of asset investment diversification on bankruptcy risk. Specifically, related and unrelated asset investment diversification affect bankruptcy risk through two mediators, namely related and unrelated business diversification. Hence, it is vital to employ the general linear structural model (GSEM) with panel data on 470 businesses publicly listed in Vietnam from 2008 to 2017. Surprisingly, the empirical results show that both related and unrelated asset diversification have positive impacts on bankruptcy risk. Nevertheless, only related business diversification plays a mediating role between related asset diversification and bankruptcy risk, while unrelated business diversification has an insignificant mediating effect on the relationship between unrelated asset diversification and bankruptcy risk.
{"title":"ASSET INVESTMENT DIVERSIFICATION, BANKRUPTCY RISK AND THE MEDIATING ROLE OF BUSINESS DIVERSIFICATION","authors":"Vu Huu Thanh, Nguyen Minh Ha, M. McAleer","doi":"10.1142/S2010495221500019","DOIUrl":"https://doi.org/10.1142/S2010495221500019","url":null,"abstract":"This paper explores the structural relationship among asset investment diversification, business diversification and the bankruptcy risk of firms. Asset investment diversification is divided into two components, namely related and unrelated asset investment diversification, while business diversification includes related and unrelated business diversification. In the hypothetical relationship, business diversification is proposed to play a mediating role to explain the effect of asset investment diversification on bankruptcy risk. Specifically, related and unrelated asset investment diversification affect bankruptcy risk through two mediators, namely related and unrelated business diversification. Hence, it is vital to employ the general linear structural model (GSEM) with panel data on 470 businesses publicly listed in Vietnam from 2008 to 2017. Surprisingly, the empirical results show that both related and unrelated asset diversification have positive impacts on bankruptcy risk. Nevertheless, only related business diversification plays a mediating role between related asset diversification and bankruptcy risk, while unrelated business diversification has an insignificant mediating effect on the relationship between unrelated asset diversification and bankruptcy risk.","PeriodicalId":43570,"journal":{"name":"Annals of Financial Economics","volume":"1 1","pages":"2150001"},"PeriodicalIF":2.0,"publicationDate":"2021-04-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42196183","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}
Pub Date : 2021-04-05DOI: 10.1142/S2010495221500020
Matthew Clance, Giray Gozgor, Rangan Gupta, C. Lau
This paper investigates the relationship between economic policy uncertainty and corporate tax rates in a panel dataset of 126 countries throughout 2003–2018. We use the so-called “World Uncertainty Index” to measure the level of economic policy uncertainty. We utilize various estimation techniques and find a one-way causality from economic policy uncertainty to corporate tax rates. Specifically, a rise in economic policy uncertainty leads to higher corporate tax rates. We also discuss potential implications.
{"title":"THE RELATIONSHIP BETWEEN ECONOMIC POLICY UNCERTAINTY AND CORPORATE TAX RATES","authors":"Matthew Clance, Giray Gozgor, Rangan Gupta, C. Lau","doi":"10.1142/S2010495221500020","DOIUrl":"https://doi.org/10.1142/S2010495221500020","url":null,"abstract":"This paper investigates the relationship between economic policy uncertainty and corporate tax rates in a panel dataset of 126 countries throughout 2003–2018. We use the so-called “World Uncertainty Index” to measure the level of economic policy uncertainty. We utilize various estimation techniques and find a one-way causality from economic policy uncertainty to corporate tax rates. Specifically, a rise in economic policy uncertainty leads to higher corporate tax rates. We also discuss potential implications.","PeriodicalId":43570,"journal":{"name":"Annals of Financial Economics","volume":"1 1","pages":"2150002"},"PeriodicalIF":2.0,"publicationDate":"2021-04-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45241037","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}
Pub Date : 2021-03-31DOI: 10.1142/S2010495221010016
M. McAleer
{"title":"SUBMISSIONS AND ACCEPTANCES FOR THE ANNALS OF FINANCIAL ECONOMICS (AFE)","authors":"M. McAleer","doi":"10.1142/S2010495221010016","DOIUrl":"https://doi.org/10.1142/S2010495221010016","url":null,"abstract":"","PeriodicalId":43570,"journal":{"name":"Annals of Financial Economics","volume":"1 1","pages":"2101001"},"PeriodicalIF":2.0,"publicationDate":"2021-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42727793","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}
Pub Date : 2021-03-01DOI: 10.1142/S2010495221500056
Paulo Guimarães, Osvaldo Candido, André Ricardo de Pinho Ronzani
The present work focused on studying which factors affect Brazilian inflation-linked corporate bond prices in a primary market setting. The explanatory variables tested were rating, maturity, duration, issuer governance level, industrial classification, collateral, tax exemption, public offering modality, financial volume, coupon frequency, number of issues, number of days since going public, and the Brazilian basic interest rate target. In order to choose the set of variables with best predictive performance, best subsets ordinary least square (OLS) and least absolute shrinkage and selection operator (LASSO) were applied on a testing sample. For estimating purposes, we also tested the Ridge estimator. For both LASSO and Ridge, we used the k-fold approach to choose the optimal value for the lambda penalty. In terms of smallest mean squared error, the OLS estimator outperformed both the Ridge and the LASSO. This result suggests that the variance-bias trade-off might not be a concern for the Brazilian case.
{"title":"REGULARIZATION METHODS FOR ESTIMATING A MULTI-FACTOR CORPORATE BOND PRICING MODEL: AN APPLICATION FOR BRAZIL","authors":"Paulo Guimarães, Osvaldo Candido, André Ricardo de Pinho Ronzani","doi":"10.1142/S2010495221500056","DOIUrl":"https://doi.org/10.1142/S2010495221500056","url":null,"abstract":"The present work focused on studying which factors affect Brazilian inflation-linked corporate bond prices in a primary market setting. The explanatory variables tested were rating, maturity, duration, issuer governance level, industrial classification, collateral, tax exemption, public offering modality, financial volume, coupon frequency, number of issues, number of days since going public, and the Brazilian basic interest rate target. In order to choose the set of variables with best predictive performance, best subsets ordinary least square (OLS) and least absolute shrinkage and selection operator (LASSO) were applied on a testing sample. For estimating purposes, we also tested the Ridge estimator. For both LASSO and Ridge, we used the k-fold approach to choose the optimal value for the lambda penalty. In terms of smallest mean squared error, the OLS estimator outperformed both the Ridge and the LASSO. This result suggests that the variance-bias trade-off might not be a concern for the Brazilian case.","PeriodicalId":43570,"journal":{"name":"Annals of Financial Economics","volume":"16 1","pages":"2150005"},"PeriodicalIF":2.0,"publicationDate":"2021-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43121821","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}
Pub Date : 2020-12-16DOI: 10.1142/s201049522050013x
Duong Dang Khoa, P. T. Anh, L. Duyên
This study investigates empirically how net-working-capital (NWC) affects firm value, using a sample of the Vietnamese stock market. Our empirical results indicate an optimal NWC level that maximiz...
{"title":"TESTING TRADE-OFF THEORY BETWEEN NETWORKING CAPITAL AND FIRM VALUE: EMPIRICAL EVIDENCE FROM VIETNAM","authors":"Duong Dang Khoa, P. T. Anh, L. Duyên","doi":"10.1142/s201049522050013x","DOIUrl":"https://doi.org/10.1142/s201049522050013x","url":null,"abstract":"This study investigates empirically how net-working-capital (NWC) affects firm value, using a sample of the Vietnamese stock market. Our empirical results indicate an optimal NWC level that maximiz...","PeriodicalId":43570,"journal":{"name":"Annals of Financial Economics","volume":"15 1","pages":"2050013"},"PeriodicalIF":2.0,"publicationDate":"2020-12-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44612370","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}
Pub Date : 2020-12-01DOI: 10.1142/S2010495220500190
Giang Thi Huong Vuong, Manh Huu Nguyen
Our paper investigates the influence of state ownership on the linkage between revenue diversification and risk of Vietnam domestic commercial banks in the period 2009–2018. By using the Generalize...
{"title":"REVENUE DIVERSIFICATION AND BANKING RISK: DOES THE STATE OWNERSHIP MATTER? EVIDENCE FROM AN EMERGING MARKET","authors":"Giang Thi Huong Vuong, Manh Huu Nguyen","doi":"10.1142/S2010495220500190","DOIUrl":"https://doi.org/10.1142/S2010495220500190","url":null,"abstract":"Our paper investigates the influence of state ownership on the linkage between revenue diversification and risk of Vietnam domestic commercial banks in the period 2009–2018. By using the Generalize...","PeriodicalId":43570,"journal":{"name":"Annals of Financial Economics","volume":"15 1","pages":"2050019"},"PeriodicalIF":2.0,"publicationDate":"2020-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42386454","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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