nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒01‒19
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Hedge Fund Portfolio Diversification Strategies Across the GFC By David E. Allen; Michael McAleer; Shelton Peiris; Abhay K. Singh
  2. The Relationship Between Stock Returns and Investor Sentiment: Evidence from Social Media By Zachary McGurk; Andrew T. Young

  1. By: David E. Allen (School of Accounting, Finance and Economics Edith Cowan University, Australia.); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University.); Shelton Peiris (School of Mathematics and Statistics, University of Sydney); Abhay K. Singh (School of Accounting, Finance and Economics, Edith Cowan University, Australia)
    Abstract: This paper features an analysis of the e_ectiveness of a range of portfolio diversification strategies as applied to a set of 17 years of monthly hedge fund index returns on a set of ten market indices representing 13 major hedge fund categories, as compiled by the EDHEC Risk Institute. The 17-year period runs from the beginning of 1997 to the end of August 2014. The sample period, which incorporates both the Global Financial Crisis (GFC) and subsequent European Debt Crisis (EDC), is a challenging one for the application of diversi_cation and portfolio investment strategies. The analysis features an examination of the diversification bene_ts of hedge fund investments through successive crisis periods. The connectedness of the Hedge Fund Indices is explored via application of the Diebold and Yilmaz (2009, 2014) spillover index. We conduct a series of portfolio optimisation analyses: comparing Markowitz with naive diversi_cation, and evaluate the relative e_ectiveness of Markowitz portfolio optimisation with various draw-down strategies, using a series of backtests. Our results suggest that Markowitz optimisation matches the characteristics of these hedge fund indices quite well.
    Keywords: Hedge Fund Diversi_cation, Spillover Index, Markowitz Analaysis, Downside Risk, CVaR, Draw-Down.
    JEL: G11 C61
    Date: 2014
  2. By: Zachary McGurk (West Virginia University, College of Business and Economics); Andrew T. Young (West Virginia University, College of Business and Economics)
    Abstract: The recent behavioral finance literature has found investor sentiment having some predictive ability in equity returns. This differs from the standard finance theory provides no role for investor sentiment. We examine the relationship between investor sentiment and stock returns by employing textual analysis on social media posts. Overall we find that our investor sentiment measure has a positive and significant effect on stock returns. These finds are consistent across a number of different models and specifications, thus finding further evidence against the standard finance theory.
    Keywords: Investor Sentiment, Stock Returns, Social Media, Predictive Regression
    JEL: G12 G13 G14
    Date: 2014–12

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