Journal of Asset Management最新文献

We examine the covariances of corporate bonds in emerging markets (EM) and present an asset pricing framework using instrumented principal component analysis (IPCA) that includes characteristics at the sovereign and bond levels. Our results indicate that EM bond returns are significantly influenced by country-specific risks. Incorporating these characteristics can improve both the total and cross-sectional model fit. We demonstrate that a factor framework tailored to the nuances of the EM universe generates a significant alpha of 2% per annum against the market and a higher information ratio than alternative asset pricing models, such as a conditional beta model designed for developed market (DM) bonds.

This article demonstrates the use of foreign-exchange (FX) derivatives in portfolio management, highlighting the strategic applications of FX forwards, futures, swaps, and options. It begins by detailing how these derivatives help institutional investors mitigate the adverse effects of currency fluctuations on internationally diversified portfolios. A significant focus is placed on currency hedging with derivatives overlays, which consolidate currency exposures across asset classes into a centralized management function, thereby enhancing overall risk management. The article also delves into the strategic uses of FX options, which offer flexible, tailored risk management strategies crucial for handling the complex dynamics of global financial markets. Through real-world examples and theoretical insights, the article illustrates the critical role of FX derivatives in stabilizing portfolio returns and managing exposure to currency risks.

Three real-world applications of derivatives in managing equity portfolios focusing on enhancing income using stock index options are illustrated in this article. Where these strategies are applied, providing practical examples and detailed analyses of their outcomes, is explained. The common pitfalls of option income strategies, particularly the impact of market volatility on yields, and how adjusting strike prices systematically can help achieve more stable income are described. This strategic insight is crucial for portfolio managers looking to enhance their income while managing risk effectively in their equity portfolios.

This article provides real-world applications of equity derivatives in portfolio management, providing a practical approach that transcends the theoretical focus often found in academic literature and derivatives textbooks. The three primary applications include using stock index futures for effective liquidity management, employing cash equitization strategies with futures to optimize cash holdings, and utilizing options to assess and manage event-driven market risks. Each application provides detailed real-world cases, demonstrating how these derivatives serve as essential tools for portfolio managers in enhancing performance and aligning with strategic investment goals.

This study examines how exposure to climate risk, encompassing physical, transition, and regulation risks, affects stock returns. Our main contribution is the insight that stocks with positive temperature co-variation earn lower future returns, acting as a hedge during periods of heightened investor marginal utility. Additionally, a positive change in a firm’s environmental score is associated with higher stock returns, while a higher level of environmental score corresponds to lower stock returns. To evaluate the contribution of climate change factors in the asset pricing model, we construct climate change factor-mimicking portfolios. Empirical results demonstrate that the model, comprising the temperature anomaly factor, climate news factor, and corporate environment factor, consistently outperforms the Fama–French 5-factor and q-factor models in capturing cross-sectional variations in average stock returns. In addition, this model performs better than the model presented by Görgen et al. (2020) and Ume (2021), which incorporate only the carbon risk factor. This underscores the importance of considering multiple facets of climate change in assessing its impact on asset pricing. As a result of this, study, relying solely on one aspect of climate change, may lead to an understatement of its overall effect on financial markets. Implications of this study suggest that considering a multi-faceted approach to climate risk in asset pricing models can lead to more accurate valuation and risk management strategies in financial markets.

ESG investing and its financial performance is nowadays a hot topic luring the attention of all economic agents. All developed financial markets offer sustainable indices to meet the ethical needs of investors. However, this is not the case for a large share of emerging financial markets. This study aims to analyze the financial performance of several MSCI European ESG indices and compare it to their respective conventional benchmarks. We investigate financial performance through time and also over different market conditions using both static and dynamic financial performance measures. The static analysis shows that the sustainable indices are as performant as the conventional index, in most cases. The Emerging Market (EM) Europe ESG Leaders index is less risky than the benchmark. However, the dynamic financial performance analysis reveals that CAPM alpha and beta are time-varying. The rolling window annual analysis shows that the EM Europe ESG Leaders index offers an interesting investment option since it beats the benchmark, less risky and offers the highest performance. Finally, the Markov-Switching analysis indicates that alphas and betas mainly depend on stock market conditions. Indeed, in high volatility market, risk-averse investors would be interested in investing in the ESG index since it reduces market risk. Moreover, when the market is more stable, the sustainable EM Europe ESG Leaders index offers better performance.

Holding volatility as part of an institutional portfolio is often found not to benefit the overall characteristics of the resulting portfolio. This applies to both simple buy and hold but also to short-selling VIX futures to harvest the volatility risk premium. We show that the latter generates positive returns but is unlikely to benefit an existing equity portfolio due to the high correlation with the returns of the S&P 500. Instead, we propose to harvest the volatility risk premium using the full term structure of the VIX in a robust Markowitz (J Financ 7(1):77–91, 1952. https://doi.org/10.2307/2975974)-framework based on Pedersen et al. (Financ Anal J 77(2):124–151, 2021. https://doi.org/10.1080/0015198X.2020.1854543). We show that VIX carry forecasts have predictive power for the futures returns and consequently use these as a market return expectations. In a number of out-of-sample tests, we find that such ex ante Sharpe-optimal portfolios not only yield statistically significant positive performances but also add significant Alpha over typical equity and fixed income factor returns. Several robustness tests confirm that these findings are insensitive to the specific parameter choices. Overall, we conclude that the volatility risk premium can be harvested profitably with a simple dynamic framework using the full term structure of VIX futures—both stand-alone and in the context of an existing institutional portfolio.

We investigate how changes in demand for Environment, Social and Governance (ESG) characteristics affect stock prices. We consider three scenarios: increased demand for ESG characteristics by investors, shifts in assets under management from institutions with low demand for ESG characteristics to those with high demand, and changes in the ESG characteristics of the stocks themselves. To compute the effects of the scenarios, we use a demand-based asset pricing model which is calibrated to individual stock-level holdings of institutional investors. We find that these scenarios lead to significantly different returns of stocks with different ESG characteristics.

At the beginning of factor investing research, the investment universe concentrated on developed markets and transaction costs were paid little attention. Expensive trading costs of factor investing in emerging equity markets influence optimal portfolio decisions. Based on a total costs estimate of factor-based portfolio tilts, a simple cost-mitigation approach increases net performance. Exploiting the structure of market impact, we indirectly control the costs by limiting order sizes relative to their underlying stocks’ short-term liquidity. This cost-efficient strategy yields better implementability and lower-priced turnover while a possible negative effect on gross performance is more than offset.