Abstract: We investigate two alternative explanations why men may hold more stocks than women do Apart from the traditional explanation of a gender difference in risk aversion, gender differences in either optimism or in perceived risk of financial markets might cause men to hold riskier assets Our results show that men tend to be significantly more optimistic than women regarding a broad range of issues, including the economy and financial markets After we take differences in optimism into account, systematic gender differences in asset allocations disappear

Abstract: This paper investigates risk-taking in the liquid portfolios held by a large panel of Swedish twins. We document that the portfolio share invested in risky assets is an increasing and concave function of financial wealth, leading to different risk sensitivities across investors. Human capital, which we estimate directly from individual labor income, also affects risk-taking positively, while internal habit and expenditure commitments tend to reduce it. Our microfindings lend strong support to decreasing relative risk aversion and habit formation preferences. Furthermore, heterogeneous risk sensitivities across investors help reconcile individual preferences with representative-agent models.

Abstract: Stocks and bonds? Real estate? Hedge funds? Private equity? If you think those are the things to focus on in building an investment portfolio, Andrew Ang has accumulated a body of research that will prove otherwise In his new book Asset Management: A Systematic Approach to Factor Investing, Ang upends the conventional wisdom about asset allocation by showing that what matters aren't asset class labels but the bundles of overlapping risks they represent Making investments is like eating a healthy diet, Ang says: you've got to look through the foods you eat to focus on the nutrients they contain Failing to do so can lead to a serious case of malnutrition-for investors as well as diners The key, in Ang's view, is bad times, and the fact that every investor's bad times are somewhat different The notion that bad times are paramount is the guiding principle of the book, which offers a new approach to the age-old problem of where do you put your money? Years of experience, both as a finance professor and as a consultant, have led Ang to see that the traditional approach, with its focus on asset classes, is too crude and ultimately too costly to serve investors adequately He focuses instead on "factor risks," the peculiar sets of hard times that cut across asset classes, and that must be the focus of our attention if we are to weather market turmoil and receive the rewards that come with doing so Optimally harvesting factor premiums-on our own or by hiring others-requires identifying your particular set of hard times, and exploiting the difference between them and those of the average investor Clearly written yet chock-full of the latest research and data, Asset Management will be indispensable reading for trustees, professional money managers, smart private investors, and business students who want to understand the economics behind factor risk premiums, harvest them efficiently in their portfolios, and embark on the search for true alpha Available in OSO: http://wwwoxfordscholarshipcom/oso/public/content/economicsfinance/9780199959327/tochtml

Abstract: We analyze brokerage data and an experiment to test a cognitive-dissonance based theory of trading: investors avoid realizing losses because they dislike admitting that past purchases were mistakes, but delegation reverses this effect by allowing the investor to blame the manager instead. Using individual trading data, we show that the disposition effect -- the propensity to realize past gains more than past losses -- applies only to non-delegated assets like individual stocks; delegated assets, like mutual funds, exhibit a robust reverse-disposition effect. In an experiment, we show increasing investors' cognitive dissonance results in both a larger disposition effect in stocks and also a larger reverse-disposition effect in funds. Additionally, increasing the salience of delegation increases the reverse-disposition effect in funds. Cognitive dissonance provides a unified explanation for apparently contradictory investor behavior across asset classes and has implications for personal investment decisions, mutual-fund management, and intermediation.

Abstract: We study the impact of central clearing of over-the-counter (OTC) transactions on counterparty exposures in a market with OTC transactions across several asset classes with heterogeneous characteristics. The impact of introducing a central counterparty (CCP) on expected interdealer exposure is determined by the tradeoff between multilateral netting across dealers on one hand and bilateral netting across asset classes on the other hand. We find this tradeoff to be sensitive to assumptions on heterogeneity of asset classes in terms of `riskyness' of the asset class as well as correlation of exposures across asset classes. In particular, while an analysis assuming independent, homogeneous exposures suggests that central clearing is efficient only if one has an unrealistically high number of participants, the opposite conclusion is reached if differences in riskyness and correlation across asset classes are realistically taken into account. We argue that empirically plausible specifications of model parameters lead to the conclusion that central clearing does reduce interdealer exposures: the gain from multilateral netting in a CCP overweighs the loss of netting across asset classes in bilateral netting agreements. When a CCP exists for interest rate derivatives, adding a CCP for credit derivatives is shown to decrease overall exposures. These findings are shown to be robust to the statistical assumptions of the model as well as the choice of risk measure used to quantify exposures.

Abstract: Do differences in countries' accounting standards affect global investment decisions? We explore this question by examining how accounting distance, the difference in the accounting standards used in the investor's and the investee's countries, affects the asset allocation decisions of global mutual funds. We find that investors tend to underweight investees with greater accounting distance. Using the mandatory adoption of International Financial Reporting Standards (IFRS) as an event that changed the accounting standards of various country-pairs, we examine how two sources of changes in accounting distance—(1) changes due to IFRS adoption of the investee, and (2) changes due to IFRS adoption in the investor's country—affect global portfolio allocation decisions. We find that the tendency to underinvest in investees with greater accounting distance significantly weakens when accounting distance is reduced, either from an investee's IFRS adoption or from IFRS adoption in the investor's country. T...

Abstract: We present a model of optimal allocation to liquid and illiquid assets, where illiquidity risk results from the restriction that an asset cannot be traded for intervals of uncertain duration. Illiquidity risk leads to increased and state-dependent risk aversion, and reduces the allocation to both liquid and illiquid risky assets. Uncertainty about the length of the illiquidity interval, as opposed to a deterministic non-trading interval, is a primary determinant of the cost of illiquidity. We allow market liquidity to vary from 'normal' periods, when all assets are fully liquid, to 'illiquidity crises', when some assets can only be traded infrequently. The possibility of a liquidity crisis leads to limited arbitrage in normal times. Investors are willing to forego 2% of their wealth to hedge against illiquidity crises occurring once every ten years.

Abstract: Extreme value theory is concerned with the study of the asymptotic distribution of extreme events, that is to say events which are rare in frequency and huge in magnitude with respect to the majority of observations. Statistical methods derived from it have been employed increasingly in finance, especially for risk measurement. This paper surveys some of those main applications, namely for testing different distributional assumptions for the data, for Value‐at‐Risk and Expected Shortfall calculations, for asset allocation under safety‐first type constraints, and for the study of contagion and dependence across markets under conditions of stress.

Abstract: We assess interdependence and contagion across three asset classes (bonds, stocks, and currencies) for over 60 economies over the period 1998–2011. Using a global VAR, we test for changes in the transmission mechanism—both within and cross-market changes—during periods of global financial turbulence. Contagion effects within-market are notable in Latin American and Emerging Asian equities. In addition, in times of financial crisis, we find that US equity shocks lead to risk aversion by investors in equities and currencies globally and in some emerging market bonds. Euro area shocks are significant mainly within the bond market.

Abstract: This paper investigates an asset allocation problem for defined contribution pension funds with stochastic income and mortality risk under a multi-period mean–variance framework. Different from most studies in the literature where the expected utility is maximized or the risk measured by the quadratic mean deviation is minimized, we consider synthetically both to enhance the return and to control the risk by the mean–variance criterion. First, we obtain the analytical expressions for the efficient investment strategy and the efficient frontier by adopting the Lagrange dual theory, the state variable transformation technique and the stochastic optimal control method. Then, we discuss some special cases under our model. Finally, a numerical example is presented to illustrate the results obtained in this paper.

Abstract: We present efficient partial differential equation methods for continuous time mean-variance portfolio allocation problems when the underlying risky asset follows a jump-diffusion. The standard formulation of mean-variance optimal portfolio allocation problems, where the total wealth is the underlying stochastic process, gives rise to a one-dimensional (1D) nonlinear Hamilton-Jacobi-Bellman (HJB) partial integrodifferential equation (PIDE) with the control present in the integrand of the jump term, and thus is difficult to solve efficiently. To preserve the efficient handling of the jump term, we formulate the asset allocation problem as a 2D impulse control problem, 1D for each asset in the portfolio, namely the bond and the stock. We then develop a numerical scheme based on a semi-Lagrangian timestepping method, which we show to be monotone, consistent, and stable. Hence, assuming a strong comparison property holds, the numerical solution is guaranteed to converge to the unique viscosity solution of the corresponding HJB PIDE. The correctness of the proposed numerical framework is verified by numerical examples. We also discuss the effects on the efficient frontier of realistic financial modeling, such as different borrowing and lending interest rates, transaction costs, and constraints on the portfolio, such as maximum limits on borrowing and solvency.

Abstract: Often, the lack of mark-to-market data lures investors into the misconception that alternative asset classes and strategies represent somewhat of a “free lunch.” This article proposes solutions to measuring mark-tomarket risk in alternative and illiquid investments. The authors describe how to estimate risk factor exposures when the available asset return series may be smoothed (owing to the difficulty of obtaining market-based valuations). They show that alternative investments are exposed to many of the same risk factors that drive stock and bond returns. I nvestors have long recognized that asset-class returns are driven by a common set of risk factors. Asset allocators often use the risk factor approach to improve portfolio diversification and to translate macroeconomic views into expected asset returns. In practice, implementing a risk factor approach to asset allocation requires mapping asset classes to their underlying factor exposures, which can be challenging, especially for asset classes for which the available historical data are limited or biased. In this article, we propose solutions to measuring mark-to-market risk in alternative and illiquid investments. We describe how to estimate risk factor exposures when the available asset return series may be smoothed (owing to the difficulty of obtaining market-based valuations). We show that alternative investments are exposed to many of the same risk factors that drive stock and bond returns. Our approach has profound implications for risk estimation in an asset allocation context. For example, Figure 1 shows the difference between adjusted and reported (from index returns) volatilities for several alternative investments, as well as for public markets (equities and bonds). It also shows a measure of autocorrelation, which highlights how return smoothing contributes to the misestimation of volatility. The bottom line is that alternative investments are much more volatile— on a mark-to-market basis—than their reported index returns would suggest. This bias tends to be more pronounced for indices that are smoothed. In this article, we describe the methodology used to arrive at these adjustments and include other key risk measures relevant to asset allocation. We recognize that there already is a significant body of literature that attempts to estimate risk factor exposures for various individual alternative investments and strategies. However, little research has been done to estimate the risk factor exposures across all alternatives within an internally consistent, unified risk factor framework. Given increased allocations to alternative investments in institutional investors’ portfolios, we see an urgent need to develop a consistent approach that directly integrates the risks of alternative assets with the rest of investors’ portfolios.

Abstract: 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 a considerable data-mining bias and ignores important market frictions. To address these issues, we perform out-of-sample tests of these two timing models in which we account for realistic transaction costs. Our findings reveal that the performance of market timing strategies is highly overstated, to say the least.

Abstract: The Black-Litterman model aims to enhance asset allocation decisions by overcoming the problems of mean-variance portfolio optimization. We propose a sample based version of the Black-Litterman model and implement it on a multi-asset portfolio consisting of global stocks, bonds, and commodity indices, covering the period from January 1993 to December 2011. We test its out-of-sample performance relative to other asset allocation models and find that Black-Litterman optimized portfolios significantly outperform naive-diversified portfolios (1/N-rule and strategic weights), and consistently perform better than mean-variance, Bayes-Stein, and minimum-variance strategies in terms of out-of-sample Sharpe ratios, even after controlling for different levels of risk aversion, investment constraints, and transaction costs. The BL model generates portfolios with lower risk, less extreme asset allocations, and higher diversification across asset classes. Sensitivity analyses indicate that these advantages are due to more stable mixed return estimates that incorporate the reliability of return predictions, smaller estimation errors, and lower turnover.

Abstract: The global multi-asset market portfolio contains important information for strategic asset-allocation purposes. First, it shows the relative value of all asset classes according to the global financial investment community, which one could interpret as a natural benchmark for financial investors. Second, this portfolio may also serve as the starting point for investors who use a framework in the spirit of Black and Litterman (1992), or for investors who follow adaptive asset-allocation policies as advocated by Sharpe (2010). We estimate the invested global market portfolio for the period 1990-2012 by estimating the market capitalization for the eight asset classes: equities, private equity, real estate, high-yield bonds, emerging-market debt, investment-grade credits, government bonds and inflation-linked bonds. For the main asset categories - equities, real estate, non-government bonds and government bonds - we extend the period to 1959-2012. We provide these annual historical estimates in tabular form so that practitioners and academics can easily use these historical data going forward. To our knowledge, we are the first to document the global multi-asset market portfolio at these levels of detail for such a long period of time.

Abstract: Introducing a revolutionary new quantitative approach to hybrid securities valuation and risk management To an equity trader they are shares. For the trader at the fixed income desk, they are bonds (after all, they pay coupons, so what's the problem?). They are hybrid securities. Neither equity nor debt, they possess characteristics of both, and carry unique risks that cannot be ignored, but are often woefully misunderstood. The first and only book of its kind, The Handbook of Hybrid Securities dispels the many myths and misconceptions about hybrid securities and arms you with a quantitative, practical approach to dealing with them from a valuation and risk management point of view. Describes a unique, quantitative approach to hybrid valuation and risk management that uses new structural and multi-factor models Provides strategies for the full range of hybrid asset classes, including convertible bonds, preferreds, trust preferreds, contingent convertibles, bonds labeled "additional Tier 1," and more Offers an expert review of current regulatory climate regarding hybrids, globally, and explores likely political developments and their potential impact on the hybrid market The most up-to-date, in-depth book on the subject, this is a valuable working resource for traders, analysts and risk managers, and a indispensable reference for regulators

Abstract: I show that ambiguity (Knightian uncertainty) and learning about the equity premium can simultane- ously explain the low fraction of financial wealth allocated to stocks over the life cycle as well as the stock market participation puzzle. I assume that individuals are ambiguous about the size of the equity premium and are averse with respect to this ambiguity, which results in a lower optimal allocation to stocks over the life cycle. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity aversion leads to higher saving rates.

Abstract: The authors propose portfolios comprising simple and intuitive risk premiums (exotic betas) that are transparent and cost effective, perform well in different market environments, and are uncorrelated with equities. They are an alternative to traditional portfolios that are defined by their asset class allocations. The authors show that exotic beta investing offers a better risk–return profile than risk parity and hedge fund replication and that adjusting exposures to capture variation in risk premiums further improves performance.

Abstract: The Circle of Investment - Connecting the Dots of the Portfolio Management Cycle...Hypothesis Formulation; Portfolio Construction; Trade Execution; Risk Management; Performance Measurement and Portfolio Rebalancing...under the Purview of the Uncertainty Principle of the Social Sciences.We will look at the entire cycle of the investment process relating to all aspects of, formulating an investment hypothesis; constructing a portfolio based on that; executing the trades to implement it; on-going risk management; periodically measuring the performance of the portfolio; and rebalancing the portfolio either due to an increase in the risk parameters or due to a deviation from the intended asset allocation.We touch upon the fundamentals of multi-factor models and how they are used across the different stages of the investment cycle. We also provide several illustrative analogies that are meant to intuitively explain the pleasures and the pitfalls that can arise while managing a portfolio.If we consider the entire investment management procedure as being akin to connecting the dots of a circle, then the Circle of Investment can be represented as a dotted circle with many dots falling approximately on the circumference and with no clue about the exact location of the centre or the length of the radius.We represent the investment process as a dotted circle since there is a lot of ambiguity in the various steps involved. The circle also indicates the repetitive nature of many steps that are continuously carried out while investing.While there are numerous methods that can be applied to each step of the process, we mention the ones that are most used in practice and highlight the elements that a practitioner needs to watch out for. In the beginning, we consider the idea of market efficiency and equilibrium and the lack of both, though we find that there is a tendency to move towards efficiency and the establishment of states of pseudo-equilibrium. This leads to the realization that any hypothesis comes with limitations and that investments are constantly under the shadow of this uncertainty.This work introduces two new points pertaining to this dotted circle and improves the ability; to understand how far-off this dotted circle is, from a more well-defined circle and; to create a well-formed circle. One point lies close to the centre of the circle and helps clarify both the size and shape of the circle. The other point lies on the periphery of the circle and helps with forming a more round shape.The two innovations we introduce regarding the investment life-cycle are: 1. The first, relating to the limitations that apply to any finding in the social sciences, would be the additional point we introduce that lies near the centre of the circle. We title this as, “The Uncertainty Principle of the Social Sciences”.2. The second, relating to establishing confidence levels in a systematic manner for each view we associate with a security or group of securities as required by the Black Litterman framework, would be the new point we present near the circumference of the circle.We restrict ourselves primarily to the equity asset class, while clarifying earlier on that the main differences between asset classes are simply due to the contractual terms and the number of parties involved in the transfer of wealth. In addition to equities, we look at the execution costs that apply to foreign exchange, fixed income and commodities. This is important since some equity portfolios could be across different markets and hence have currency exposure; or the portfolio could hold high grade fixed income instruments, in lieu of holding cash; or there might be the occasional active bet on commodities to increase the return or as a diversification measure.