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on Risk Management |
| By: | Jan J J Groen; Ravi Balakrishnan |
| Abstract: | In this paper we report estimates of the effective sterling, sterling/Deutsche mark and sterling/US dollar risk premia over a monthly 1987-2001 sample, generated using a conditional factor model for the stochastic discount factor of a representative 'worldwide' investor. The model relates this stochastic discount factor to the real return on a 'worldwide' stock portfolio, with the model parameters varying with variations in the slope of the 'world' term structure of interest rates. Econometric tests indicate that this model is accepted by the data. The corresponding parameter estimates are used to compute the risk premium for the three aforementioned sterling exchange rates. A graphical analysis indicates that, in terms of magnitude, our measure of the exchange rate risk premium is mainly of importance for the sterling/Deutsche mark exchange rate. Risk-adjusted test regressions for uncovered interest rate parity vis-`a-vis the major European currencies provide some confirmation for this. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:250&r=rmg |
| By: | WILLIAM N. GOETZMANN (Yale School of Management - International Center for Finance); ARTURO BRIS (Yale School of Management); NING ZHU (University of California, Davis - Graduate School of Management) |
| Abstract: | Short-selling differs significantly around the world, and practice depends not only on regulatory structure but upon costs and tax considerations. Our survey of world markets suggests that, while as much as 93 percent of the world\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\'s equity market by capitalization is shortable, there are particular regions of the world where it is difficult to take a short position. These include several countries in Southeast Asia and South America. When dual listings in markets allowing short-sales are considered, the capitalization that is potentially shortable increases to 96 percent. In this paper, we examine what factors in the global equity universe are not shortable and consider the implications for long-short strategies tied to global indices and futures instruments. We find important periods when an index of non-shortable securities is a major determinant of the global equity portfolio. We ask whether short-sales constraints are binding on global index arbitrage. |
| Date: | 2005–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:ysm:somwrk:ysm453&r=rmg |
| By: | WILLIAM N. GOETZMANN (Yale School of Management - International Center for Finance); ALOK KUMAR (University of Notre Dame - Department of Finance) |
| Abstract: | This study examines the diversification decisions of more than 60,000 individual investors during a six year period (1991-96) in recent U.S. capital market history. The majority of investors in our sample are under-diversified and the extent of under-diversification is more severe in retirement accounts. Investors\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\' personal characteristics, their stock preferences, and their behavioral biases jointly influence their diversification choices. Younger, lower-income (less wealthy), and relatively less sophisticated investors and those who follow price trends, prefer local (familiar) stocks, and exhibit over-confidence hold relatively less diversified portfolios. Under-diversified investors exhibit strong style and industry preferences and they also prefer more volatile and positively skewed stocks. Furthermore, we find some evidence to support the asymmetric information hypothesis for under diversification. In contrast, we find that factors such as small portfolio size, transaction costs, and search costs are unlikely determinants of investors\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\' diversification choices. The unexpectedly high idiosyncratic risk in investors\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\' portfolios results in a welfare loss. |
| JEL: | G11 G12 |
| Date: | 2005–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:ysm:somwrk:ysm454&r=rmg |
| By: | WILLIAM N. GOETZMANN (Yale School of Management - International Center for Finance) |
| Abstract: | History demonstrates that global capital markets can contract as well as expand. A long-term view of finance suggests that we should prepare for periodic segmentation as well as integration of markets in the 21st Century. Anti-capitalist ideologies have historically been the vectors of attack on the cross-border flow of capital, however the fundamental cause may actually be domestic hostility towards foreign ownership and control. The roots of the conflict between domestic interests and foreign investors may be inherent in global equilibrium models. In a frictionless capital market, foreigners will always own a greater proportion of a small economy\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\'s assets. By the same token, domestic investors in small economies will always seek to export most of their capital. This equilibrium is at odds with a stable condition of national ownership and control of assets. |
| JEL: | N23 N24 F3 |
| Date: | 2005–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:ysm:somwrk:ysm455&r=rmg |