Search results for "Asset allocation"
showing 10 items of 24 documents
GARCH models with changes in variance: An approximation to risk measurements
2003
This study aims to model volatility as an approximation to an optimum measurement of stock market risk because of the importance of this concept for, among other things, the proper management of portfolios. Following the proposal of Lamoureux and Lastrapes (1990), the authors consider that the high degree of persistence detected in GARCH models arises from a poor specification of the equation of the variance due to not considering the possible deterministic changes in the unconditional variance of the financial series. To determine the point in time as well as the duration of these changes, the proposal made by Inclan and Tiao (1994) is used. As an empirical application, whether or not the …
The real-life performance of market timing with moving average and time-series momentum rules
2014
In this article, we revisit the myths regarding the superior performance of market timing strategies based on moving average and time-series momentum rules. These active timing strategies are very appealing to investors because of their extraordinary simplicity and because they promise substantial advantages over their passive counterparts. However, the ‘too good to be true’ reported performance of these market timing rules raises a legitimate concern as to whether this performance is realistic and whether investors can expect that future performance will be the same as the documented historical performance. We argue that the reported performance of market timing strategies usually contains…
Learning and the Price Dynamics of a Double-Auction Financial Market with Portfolio Traders
2006
In this paper we study the dynamics of price adjustments in an artificial market where portfolio traders with bounded rationality and limited resources interact through a continuous, electronic open book. The present work extends the model developed in [? ] introducing endogenous target individual portfolio holdings. We model the agents’ order-flow investment decision as an optimal choice given individual characteristics and the available information. We depart from the standard asset pricing framework in two ways. First, we assume that investors have imperfect information about the returns distribution. In particular, we assume that agents hold arbitrary priors about securities’ returns, w…
Forecasting the Equity Risk Premium in the European Monetary Union
2018
This article examines the performance of several variables that could be good predictors of the equity risk premium in the European Monetary Union for a period that spans from 2000 to 2015. In-sample, technical indicators display predictive power, matching or exceeding that of traditional economic forecasting variables. We also find consistent results in the fact that combining information from technical and economic variables improves equity risk premium forecasts, compared to using these variables alone. Nevertheless, out-of-sample exercises do not confirm in-sample results. Economic predictors show stronger out-of-sample forecasting ability than technical indicators, and apart from volum…
Investing for the Long Run
2017
This paper studies long term investing by an investor that maximizes either expected utility from terminal wealth or from consumption. We introduce the concepts of a generalized stochastic discount factor (SDF) and of the minimum price to attain target payouts. The paper finds that the dynamics of the SDF needs to be captured and not the entire market dynamics, which simplifies significantly practical implementations of optimal portfolio strategies. We pay particular attention to the case where the SDF is equal to the inverse of the growth-optimal portfolio in the given market. Then, optimal wealth evolution is closely linked to the growth optimal portfolio. In particular, our concepts allo…
Fooled by Data-Mining: The Real-Life Performance of Market Timing with Moving Averages
2013
In this paper, we revisit the myths regarding the superior performance of market timing strategies based on moving average and time-series momentum rules. These active timing strategies are very appealing to investors because of their extraordinary simplicity and because they promise substantial advantages over their passive counterparts (see, for example, the paper by M. Faber (2007) "A Quantitative Approach to Tactical Asset Allocation" published in the Journal of Wealth Management). However, the ``too good to be true" reported performance of these market timing rules raises a legitimate concern as to whether this performance is realistic and whether investors can expect that future perfo…
Designing Guarantee Options in Defined Contribution Pension Plans
2015
The shift from defined benefit (DB) to defined contribution (DC) is pervasive among pension funds, due to demographic changes and macroeconomic pressures. In DB all risks are borne by the provider, while in plain vanilla DC all risks are borne by the beneficiary. For DC to provide income security some kind of guarantee is required. A minimum guarantee clause can be modeled as a put option written on some underlying reference portfolio of assets and we develop a discrete model that optimally selects the reference portfolio to minimise the cost of a guarantee. While the relation DB-DC is typically viewed as a binary one, the model can be used to price a wide range of guarantees creating a con…
A Perturbation Approach to Continuous-Time Portfolio Selection Under Stochastic Investment Opportunities
2013
This paper studies portfolio selection in continuous-time models with stochastic investment opportunities. We consider asset allocation problems where preferences are specified as power utility derived from terminal wealth as well as consumption-savings problems with recursive utility Epstein-Zin preferences. The paper approximates the associated dynamic programming problem by perturbing the coefficients of the stochastic dynamics. We represent the Hamilton-Jacobi-Bellman equation as a series of partial differential equations that can be solved iteratively in closed-form through computer algebra software, at any desired accuracy.
Asset Return Dynamics under Alternative Learning Schemes
2009
In this paper we design an artificial financial market where endogenous volatility is created assigning to the agents diverse prior beliefs about the joint distribution of returns, and, over time, making agents rationally update their beliefs using common public information. We analyze the asset price dynamics generated under two learning environments: one where agents assume that the joint distribution of returns is IID, and another where agents believe in the existence of regimes in the joint distribution of asset returns. We show that the regime switching learning structure can generate all the most common stylized facts of financial markets: fat tails and long-range dependence in volati…
Designing and pricing guarantee options in defined contribution pension plans
2015
Abstract The shift from defined benefit (DB) to defined contribution (DC) is pervasive among pension funds, due to demographic changes and macroeconomic pressures. In DB all risks are borne by the provider, while in plain vanilla DC all risks are borne by the beneficiary. However, for DC to provide income security some kind of guarantee is required. A minimum guarantee clause can be modeled as a put option written on some underlying reference portfolio and we develop a discrete model that selects the reference portfolio to minimize the cost of a guarantee. While the relation DB–DC is typically viewed as a binary one, the model shows how to price a wide range of guarantees creating a continu…