•Risk tolerance is positively related to subjective expectations of remaining life span.•Also the share of financial assets allocated to stocks increases with subjective life horizon.•The impact of ...horizon on the risky asset share is stronger for households without bequest motives.
Using data from a U.S. household survey, we examine the empirical relation between subjective life horizon (i.e., the self-reported expectation of remaining life span) and portfolio choice. We find that equity portfolio shares are higher for investors with longer horizons, controlling for gender-specific age effects, socio-economic characteristics, health, and optimism. Our result is robust to accounting for the endogeneity of equity market participation or instrumenting subjective life horizon with parental survival. Finally, we show that the effect of a shortening horizon on portfolio allocation is stronger for households without bequest motives.
► We find an inverse relationship between bank capital buffer and the business cycle. ► We provide evidence that bank portfolio risk varies anticyclically with business cycle. ► The probability of ...insolvency risk decreases for diversified banks. ► Banks with high revenue diversity achieve capital savings.
The relationship between macroeconomic developments and bank capital buffer and portfolio risk adjustments is relevant to assess the efficacy of newly created countercyclical buffer requirements. Using the U.S. bank holding company data over the period 1992:Q1–2011:Q3, we find a negative relationship between the business cycle and capital buffer. Our results offer some support for the Basel III agreements that countercyclical capital buffer in the banking sector is necessary to help the performance of the real economy during recessions. We find a robust evidence of inverse relationship between business cycle and bank default risk. Our analysis provides evidence of diversification benefits. The probability of insolvency risk decreases for diversified banks and banks with high revenue diversity achieve capital savings.
Numerous empirical studies show that portfolio returns are generally asymmetric, and investors would prefer a portfolio return with larger degree of asymmetry when the mean value and variance are ...same. In order to measure the asymmetry of fuzzy portfolio return, a concept of skewness is defined as the third central moment in this paper, and its mathematical properties are studied. As an extension of the fuzzy mean-variance model, a mean-variance-skewness model is presented and the corresponding variations are also considered. In order to solve the proposed models, a genetic algorithm integrating fuzzy simulation is designed. Finally, several numerical examples are given to illustrate the modelling idea and the effectiveness of the proposed algorithm.
Long‐Run Risk: Is It There? LIU, YUKUN; MATTHIES, BEN
The Journal of finance (New York),
June 2022, Letnik:
77, Številka:
3
Journal Article
Recenzirano
ABSTRACT
This paper documents the existence of a persistent component in consumption growth. We take a novel approach using news coverage to capture investor concern about economic growth prospects. ...We provide evidence that consumption growth is highly predictable over long horizons—our measure explains between 23% and 38% of cumulative future consumption growth at the five‐year horizon and beyond. Furthermore, we show a strong connection between this predictability and asset prices. Innovations to our measure price 51 standard portfolios in the cross section and our one‐factor model outperforms many benchmark macro‐ and return‐based multifactor models.
Equity Portfolio Diversification Goetzmann, William N; Kumar, Alok
Review of Finance,
01/2008, Letnik:
12, Številka:
3
Journal Article
Recenzirano
Odprti dostop
This study shows that U.S. individual investors hold under-diversified portfolios, where the level of under-diversification is greater among younger, low-income, less-educated, and less-sophisticated ...investors. The level of under-diversification is also correlated with investment choices that are consistent with over-confidence, trend-following behavior, and local bias. Furthermore, investors who over-weight stocks with higher volatility and higher skewness are less diversified. In contrast, there is little evidence that portfolio size or transaction costs constrains diversification. Under-diversification is costly to most investors, but a small subset of investors under-diversify because of superior information.
The frequency of incomplete portfolios consisting of a few risk-free assets is an important issue in household portfolio selection, and its cause has not yet been satisfactorily identified. Using ...data from the Shaanxi Province survey of rural residents’ financial assets in China, this paper validates the influence path model of household portfolios to understand the determinants of rural household’s ownership of risky financial assets. The structural equation modelling method is used to illustrate the complex relationship between household portfolio allocation and influencing factors. The results show that holding risky financial assets is directly determined by total financial assets, risky investment intentions and financial market knowledge. Ability, desire and awareness are all indispensable for holding risky financial assets, which can explain most of the incomplete participant problem. Household wealth, financial literacy, age and education have indirect influences along different paths through these three mediation variables. In addition, a second house is separated from real estate that only includes the residential house and defined investments. A path analysis also shows that real estate (residential house, home appliances and vehicles) does not have a significant effect on holding risky financial assets, while an investment house will crowd out and substitute financial assets and have a negative influence on holding risky financial assets. The findings could help explain the fairly simple and safe structure of the typical household portfolio in rural China and other undeveloped regions and may also have important policy implications for developing risky financial markets in similar regions.
•We investigate the time-scale relationships between US equity & commodity markets.•The risk-return profitability analysis is based on the wavelet coherence measure.•Both markets exhibit time-varying ...co-movement patterns across investment horizons.•We find evidence of time-frequency causality between the two investigated markets.•The results have implications for asset allocation & portfolio diversification.
We investigate the time-scale relationships between US equity and commodity markets. The empirical evidence from the risk-return profitability analysis based on the wavelet coherence measure shows that equity and commodity markets exhibit time-varying co-movement patterns and behave differently across investment horizons. Moreover, we find evidence of time-frequency causality between the two investigated markets. Our results can have important implications for optimal asset allocation and portfolio diversification.
The low level of financial literacy across households suggests that they are at risk of making suboptimal financial decisions. In this paper, we analyze the effect of investors’ financial literacy on ...their decision to demand professional, non-independent advice. We find that non-independent advisors are not sufficient to alleviate the problem of low financial literacy. The investors with a low level of financial literacy are less likely to consult an advisor, but they delegate their portfolio choice more often or do not invest in risky assets at all. We explain this evidence with a highly stylized model of strategic interaction between investors and better informed advisors with conflicts of interests. The advisors provide more information to knowledgeable investors, who anticipating this are more likely to consult them.
•We present a mixed-integer multistage stochastic model that includes investment opportunities in illiquid and long-term infrastructure projects in the context of renewable energies, which are also ...subject to policy risk.•We present a tailored moving-horizon approach together with suitable approximations and simplifications of the model.•We evaluate these approximations and simplifications in a computational sensitivity analysis.•We derive a final version of the model that can be tackled on a realistic instance by our moving-horizon approach.
Portfolio optimization is an ongoing hot topic of mathematical optimization and management science. Due to the current financial market environment with low interest rates and volatile stock markets, it is getting more and more important to extend portfolio optimization models by other types of investments than classical assets. In this paper, we present a mixed-integer multistage stochastic model that includes investment opportunities in irreversible and long-term infrastructure projects in the context of renewable energies, which are also subject to policy risk. On realistic time scales for investment problems of this type, the resulting instances are by far too large to be solved with today’s most evolved optimization software. Thus, we present a tailored moving-horizon approach together with suitable approximations and simplifications of the model. We evaluate these approximations and simplifications in a computational sensitivity analysis and derive a final model that can be tackled on a realistic instance by our moving-horizon approach.
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