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Market Portfolio (market + portfolio)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	100%

Selected Abstracts

A currency index global capital asset pricing model

EUROPEAN FINANCIAL MANAGEMENT, Issue 1 2000
Thomas J. O'Brien
The application of an international capital asset pricing relationship with two factors, the global market portfolio and a currency index, is described and illustrated. The model and illustration help demonstrate a problem with the common practice of adjusting an asset's expected rate of return across currencies via nominal riskless interest rate differentials. [source]

Capital Allocation and Risk Performance Measurement In a Financial Institution

FINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS, Issue 5 2000
Stuart M. Turnbull
This paper provides an analytical and practical framework, consistent with maximizing the wealth of existing shareholders, to address the following questions: What are the costs associated with economic capital? What is the tradeoff between the probability of default and the costs of economic capital? How do we take into account the time profile of economic capital when assessing the performance of a business? What is the appropriate measure of profitability, keeping the probability of default constant? It is shown that the capital budgeting decision depends not only on the covariance of the return of a project with the market portfolio, but also on the covariance with the bank's existing assets. This dependency arises from the simple fact that the economic capital is not additive. [source]

Corporate Sustainability Performance and Idiosyncratic Risk: A Global Perspective

FINANCIAL REVIEW, Issue 2 2009
Darren D. Lee
G11; G30; Q56 Abstract Does investing in sustainability leaders affect portfolio performance? Analyzing two mutually exclusive leading and lagging global corporate sustainability portfolios (Dow Jones) finds that (1) leading sustainability firms do not underperform the market portfolio, and (2) their lagging counterparts outperform the market portfolio and the leading portfolio. Notably, we find leading (lagging) corporate social performance (CSP) firms exhibit significantly lower (higher) idiosyncratic risk and that idiosyncratic risk might be priced by the broader global equity market. We develop an idiosyncratic risk factor and find that its inclusion significantly reduces the apparent difference in performance between leading and lagging CSP portfolios. [source]

Market Price of Risk: A Comparison among the United States, United Kingdom, Australia and Japan,

INTERNATIONAL REVIEW OF FINANCE, Issue 4 2009
KENT WANG
ABSTRACT This study examines and compares the market price of risk of the S&P 500, FTSE 100, All Ordinaries, and Nikkei 225 markets from 1984 to 2009 in the framework of Intertemporal Capital Asset Pricing Model (ICAPM). We follow the Vector Autoregressive instrumental variable approach in identifying the risk and hedge components of market returns and argue that in the context of market integration, covariance with a world market portfolio is a better measure of market risk than conditional market variance. Evidence is documented in support of using covariance as a risk measure in explaining market risk premiums in the Australian and Japanese markets. CAY, the consumption wealth ratio from the US market is found to be a robust state variable that helps to explain both conditional variance and covariance processes in the four markets. The market prices of risk, after controlling for the hedging demands, are positive and significant with the United States having the highest price of risk. The results are confirmed using a series of robustness tests that include varying the sampling interval. [source]

Extreme US stock market fluctuations in the wake of 9/11

JOURNAL OF APPLIED ECONOMETRICS, Issue 1 2008
S. T. M. Straetmans
We apply extreme value analysis to US sectoral stock indices in order to assess whether tail risk measures like value-at-risk and extremal linkages were significantly altered by 9/11. We test whether semi-parametric quantile estimates of ,downside risk' and ,upward potential' have increased after 9/11. The same methodology allows one to estimate probabilities of joint booms and busts for pairs of sectoral indices or for a sectoral index and a market portfolio. The latter probabilities measure the sectoral response to macro shocks during periods of financial stress (so-called ,tail-,s'). Taking 9/11 as the sample midpoint we find that tail-,s often increase in a statistically and economically significant way. This might be due to perceived risk of new terrorist attacks. Copyright © 2008 John Wiley & Sons, Ltd. [source]

An Intertemporal Capital Asset Pricing Model with Owner-Occupied Housing

REAL ESTATE ECONOMICS, Issue 3 2010
Yongqiang Chu
This article studies portfolio choice and asset pricing in the presence of owner-occupied housing in a continuous time framework. The unique feature of the model is that housing is a consumption good as well as a risky asset. Under general conditions, that is, when the utility function is not Cobb,Douglas and the covariance matrix is not block-diagonal, the model shows that the market portfolio is not mean-variance efficient, and the traditional capital asset pricing model fails. Nonetheless, a conditional linear factor pricing model holds with housing return and market portfolio return as two risk factors. The model also predicts that the nondurable consumption-to-housing ratio (ch) can forecast financial asset returns. The two factor pricing model conditioning on,ch,yields a good cross-sectional fit for Fama,French 25 portfolios. [source]

Luck versus Skill in the Cross-Section of Mutual Fund Returns

THE JOURNAL OF FINANCE, Issue 5 2010
EUGENE F. FAMA
ABSTRACT The aggregate portfolio of actively managed U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark-adjusted expected returns sufficient to cover their costs. If we add back the costs in fund expense ratios, there is evidence of inferior and superior performance (nonzero true ,) in the extreme tails of the cross-section of mutual fund , estimates. [source]

Long-Run Stockholder Consumption Risk and Asset Returns

THE JOURNAL OF FINANCE, Issue 6 2009
CHRISTOPHER J. MALLOY
ABSTRACT We provide new evidence on the success of long-run risks in asset pricing by focusing on the risks borne by,stockholders. Exploiting microlevel household consumption data, we show that long-run stockholder consumption risk better captures cross-sectional variation in average asset returns than aggregate or nonstockholder consumption risk, and implies more plausible risk aversion estimates. We find that risk aversion around 10 can match observed risk premia for the wealthiest stockholders across sets of test assets that include the 25 Fama and French portfolios, the market portfolio, bond portfolios, and the entire cross-section of stocks. [source]

Presidential Address: The Cost of Active Investing

THE JOURNAL OF FINANCE, Issue 4 2008
KENNETH R. FRENCH
ABSTRACT I compare the fees, expenses, and trading costs society pays to invest in the U.S. stock market with an estimate of what would be paid if everyone invested passively. Averaging over 1980,2006, I find investors spend 0.67% of the aggregate value of the market each year searching for superior returns. Society's capitalized cost of price discovery is at least 10% of the current market cap. Under reasonable assumptions, the typical investor would increase his average annual return by 67 basis points over the 1980,2006 period if he switched to a passive market portfolio. [source]

Consumption, Aggregate Wealth, and Expected Stock Returns

THE JOURNAL OF FINANCE, Issue 3 2001
Martin Lettau
This paper studies the role of fluctuations in the aggregate consumption,wealth ratio for predicting stock returns. Using U.S. quarterly stock market data, we find that these fluctuations in the consumption,wealth ratio are strong predictors of both real stock returns and excess returns over a Treasury bill rate. We also find that this variable is a better forecaster of future returns at short and intermediate horizons than is the dividend yield, the dividend payout ratio, and several other popular forecasting variables. Why should the consumption,wealth ratio forecast asset returns? We show that a wide class of optimal models of consumer behavior imply that the log consumption,aggregate wealth (human capital plus asset holdings) ratio summarizes expected returns on aggregate wealth, or the market portfolio. Although this ratio is not observable, we provide assumptions under which its important predictive components for future asset returns may be xpressed in terms of observable variables, namely in terms of consumption, asset holdings and labor income. The framework implies that these variables are cointegrated, and that deviations from this shared trend summarize agents' expectations of future returns on the market portfolio. [source]

Implied correlation index: A new measure of diversification

THE JOURNAL OF FUTURES MARKETS, Issue 2 2005
Vasiliki D. Skintzi
Most approaches in forecasting future correlation depend on the use of historical information as their basic information set. Recently, there have been some attempts to use the notion of "implied" correlation as a more accurate measure of future correlation. This study proposes an innovative methodology for backing-out implied correlation measures from index options. This new measure called implied correlation index reflects the market view of the future level of the diversification in the market portfolio represented by the index. The methodology is applied to the Dow Jones Industrial Average index, and the statistical properties and the dynamics of the proposed implied correlation measure are examined. The evidence of this study indicates that the implied correlation index fluctuates substantially over time and displays strong dynamic dependence. Moreover, there is a systematic tendency for the implied correlation index to increase when the market index returns decrease and/or the market volatility increases, indicating limited diversification when it is needed most. Finally, the forecast performance of the implied correlation index is assessed. Although the implied correlation index is a biased forecast of realized correlation, it has a high explanatory power, and it is orthogonal to the information set compared to a historical forecast. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:171,197, 2005 [source]

ON THE ROLE OF THE GROWTH OPTIMAL PORTFOLIO IN FINANCE

AUSTRALIAN ECONOMIC PAPERS, Issue 4 2005
Article first published online: 6 DEC 200, ECKHARD PLATEN
The paper discusses various roles that the growth optimal portfolio (GOP) plays in finance. For the case of a continuous market we show how the GOP can be interpreted as a fundamental building block in financial market modeling, portfolio optimisation, contingent claim pricing and risk measurement. On the basis of a portfolio selection theorem, optimal portfolios are derived. These allocate funds into the GOP and the savings account. A risk aversion coefficient is introduced, controlling the amount invested in the savings account, which allows to characterize portfolio strategies that maximise expected utilities. Natural conditions are formulated under which the GOP appears as the market portfolio. A derivation of the intertemporal capital asset pricing model is given without relying on Markovianity, equilibrium arguments or utility functions. Fair contingent claim pricing, with the GOP as numeraire portfolio, is shown to generalise risk neutral and actuarial pricing. Finally, the GOP is described in various ways as the best performing portfolio. [source]