People are more willing to bet on their own judgments when they feel skillful or knowledgeable. We investigate whether this "competence effect" influences trading frequency and home bias. We find ...that investors who feel competent trade more often and have more internationally diversified portfolios. We also find that male investors, and investors with larger portfolios or more education, are more likely to perceive themselves as competent than are female investors, and investors with smaller portfolios or less education. Our paper also contributes to understanding the theoretical link between overconfidence and trading frequency. Existing theories on trading frequency have focused on one aspect of overconfidence, i.e., miscalibration. Our paper offers a potential mechanism for the "better-than-average" aspect of overconfidence to influence trading frequency. In the context of our paper, overconfident investors tend to perceive themselves to be more competent, and thus are more willing to act on their beliefs, leading to higher trading frequency.
Alliance portfolio diversity (APD) helps firms access diverse capabilities and knowledge. APD can also increase transaction costs, but it is unknown whether and how transaction cost theory’s (TCT’s) ...insights about hierarchical integration operate at the portfolio level. We adapt TCT to the portfolio level to suggest that the transaction costs from APD encourage integration into alliance partners’ industries, and we introduce the concept of shared‐specific investments to pinpoint one source of transaction costs within portfolios and predict which industries will be integrated. Using data from 1996–2013 on S&P 500 firms, we find evidence in support of our theorising. Juxtaposing results with other theoretical perspectives suggests that TCT offers complementary insights about which activities to perform in the firm versus the alliance portfolio.
Belief Disagreement and Portfolio Choice MEEUWIS, MAARTEN; PARKER, JONATHAN A.; SCHOAR, ANTOINETTE ...
The Journal of finance (New York),
December 2022, Letnik:
77, Številka:
6
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ABSTRACT
Using proprietary financial data on millions of households, we show that likely‐Republicans increased the equity share and market beta of their portfolios following the 2016 presidential ...election, while likely‐Democrats rebalanced into safe assets. We provide evidence that this behavior was driven by investors interpreting public information based on different models of the world. We use detailed controls to rule out the main nonbelief‐based channels such as income hedging needs, preferences, and local economic exposures. These findings are driven by a small share of investors making big changes, and are stronger among investors who trade more ex ante.
Money Doctors GENNAIOLI, NICOLA; SHLEIFER, ANDREI; VISHNY, ROBERT
The Journal of finance (New York),
February 2015, Letnik:
70, Številka:
1
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We present a new model of investors delegating portfolio management to professionals based on trust. Trust in the manager reduces an investor's perception of the riskiness of a given investment, and ...allows managers to charge fees. Money managers compete for investor funds by setting fees, but because of trust, fees do not fall to costs. In equilibrium, fees are higher for assets with higher expected return, managers on average underperform the market net of fees, but investors nevertheless prefer to hire managers to investing on their own. When investors hold biased expectations, trust causes managers to pander to investor beliefs.
Portfolio choice and health status Rosen, Harvey S; Wu, Stephen
Journal of financial economics,
06/2004, Letnik:
72, Številka:
3
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This paper analyzes the role health status plays in household portfolio decisions using data from the Health and Retirement Study. The results indicate that health is a significant predictor of both ...the probability of owning different types of financial assets and the share of financial wealth held in each asset category. Households in poor health are less likely to hold risky financial assets, other things (including the level of total wealth) being the same. Poor health is associated with a smaller share of financial wealth held in risky assets and a larger share in safe assets. We find no evidence that the relationship between health status and portfolio allocation is driven by “third variables” that simultaneously affect health and financial decisions. Further, the relationship between health status and portfolio choice does not appear to operate through the effect of poor health on individuals’ attitudes toward risk, their planning horizons, or their health insurance status.
We show a positive relation between network centrality and risk-adjusted performance in a delegated investment management setting. More connected managers take more portfolio risk and receive higher ...investor flows, consistent with these managers improving their ability to exploit investment opportunities through their network connections. Greater network connections are shown to be particularly important in reducing the diseconomies of scale for large managers who are well connected. We also use the exogenous merger of two investment consultants, which creates a sudden change in the network connections of the managers they oversee, to provide evidence that a greater number of connections translates into better portfolio performance.
Risk, Uncertainty, and Expected Returns Bali, Turan G.; Zhou, Hao
Journal of financial and quantitative analysis,
06/2016, Letnik:
51, Številka:
3
Journal Article
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A conditional asset pricing model with risk and uncertainty implies that the time-varying exposures of equity portfolios to the market and uncertainty factors carry positive risk premia. The ...empirical results from the size, book-to-market, momentum, and industry portfolios indicate that the conditional covariances of equity portfolios with market and uncertainty predict the time-series and cross-sectional variation in stock returns. We find that equity portfolios that are highly correlated with economic uncertainty proxied by the variance risk premium (VRP) carry a significant annualized 8% premium relative to portfolios that are minimally correlated with VRP.
This paper investigates the return links and volatility transmission between oil and stock markets in the Gulf Cooperation Council (GCC) countries over the period 2005–2010. We employ a recent ...generalized VAR-GARCH approach which allows for transmissions in return and volatility. In addition, we analyze the optimal weights and hedge ratios for oil-stock portfolio holdings. On the whole, our results point to the existence of substantial return and volatility spillovers between world oil prices and GCC stock markets, and appear to be crucial for international portfolio management in the presence of oil price risk.
► There exist significant shock and volatility spillovers between oil and stock markets in most cases. ► Oil price volatility caused by shocks to oil supply/demand increases GCC stock market volatility. ► Portfolio’s risk-adjusted return attributes are improved with the inclusion of the oil assets. ► Empirical findings are sensitive to country-specific factors.
It is well known that when the moments of the distribution governing returns are estimated from sample data, the out-of-sample performance of the optimal solution of a mean–variance (MV) portfolio ...problem deteriorates as a consequence of the so-called “estimation risk”. In this document we provide a theoretical analysis of the effects caused by redundant constraints on the out-of-sample performance of optimal MV portfolios. In particular, we show that the out-of-sample performance of the plug-in estimator of the optimal MV portfolio can be improved by adding any set of redundant linear constraints. We also illustrate our findings when risky assets are equally correlated and identically distributed. In this specific case, we report an emerging trade-off between diversification and estimation risk and that the allocation of estimation risk across portfolios forming the optimal solution changes dramatically in terms of number of assets and correlations.
•Out-of-sample performance improves when we add redundant constraints to the problem•We can extend this result to portfolios specially designed to mitigate estimation risk•There is a trade-off between diversification and estimation risk for low correlations.•The allocation of estimation risk changes in terms of number of assets and correlations
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