•We investigate the performance of behavioural investment strategies.•We propose a new behavioural investment objective function.•We compare the behavioural portfolio with rational and naïve ...portfolios.•We use both EUT-based and CPT-based evaluation criteria.
In this paper, we investigate the performance of behavioural portfolio strategies. We incorporate the short-term and long-term memory of the investor, thus recasting the behavioural portfolio choice process in a dynamic setting. We evaluate the out-of-sample performance of a behavioural investor in relation to both a naïve investor who invests in an equally weighted portfolio and a rational investor, who maximises expected mean-variance utility. We report a number of findings. First, from an expected utility perspective, neither the rational investor nor the CPT investor achieves a risk-adjusted return or certainty equivalent return that significantly outperforms that of the naïve investor. Second, from a CPT utility perspective, the behavioural investor outperforms both the rational and naïve investors. Third, the CPT investor typically displays highly concentrated, lottery-like asset allocations, low turnover and highly stable portfolio allocations. Fourth, the addition of the investor's memory into the portfolio choice process increases both diversification and turnover, leading to improved investment performance. Finally, by allocating more weight to positively skewed assets and increasing portfolio concentration, the probability weighting function has more impact than the utility function on the behavioural investor's performance. Our results are robust to the choice of reference return, estimation sample size, probability estimates, the probability weighting function and portfolio weight constraints.
A previous efficacy trial found benefit from inhaled budesonide for COVID-19 in patients not admitted to hospital, but effectiveness in high-risk individuals is unknown. We aimed to establish whether ...inhaled budesonide reduces time to recovery and COVID-19-related hospital admissions or deaths among people at high risk of complications in the community.
PRINCIPLE is a multicentre, open-label, multi-arm, randomised, controlled, adaptive platform trial done remotely from a central trial site and at primary care centres in the UK. Eligible participants were aged 65 years or older or 50 years or older with comorbidities, and unwell for up to 14 days with suspected COVID-19 but not admitted to hospital. Participants were randomly assigned to usual care, usual care plus inhaled budesonide (800 μg twice daily for 14 days), or usual care plus other interventions, and followed up for 28 days. Participants were aware of group assignment. The coprimary endpoints are time to first self-reported recovery and hospital admission or death related to COVID-19, within 28 days, analysed using Bayesian models. The primary analysis population included all eligible SARS-CoV-2-positive participants randomly assigned to budesonide, usual care, and other interventions, from the start of the platform trial until the budesonide group was closed. This trial is registered at the ISRCTN registry (ISRCTN86534580) and is ongoing.
The trial began enrolment on April 2, 2020, with randomisation to budesonide from Nov 27, 2020, until March 31, 2021, when the prespecified time to recovery superiority criterion was met. 4700 participants were randomly assigned to budesonide (n=1073), usual care alone (n=1988), or other treatments (n=1639). The primary analysis model includes 2530 SARS-CoV-2-positive participants, with 787 in the budesonide group, 1069 in the usual care group, and 974 receiving other treatments. There was a benefit in time to first self-reported recovery of an estimated 2·94 days (95% Bayesian credible interval BCI 1·19 to 5·12) in the budesonide group versus the usual care group (11·8 days 95% BCI 10·0 to 14·1 vs 14·7 days 12·3 to 18·0; hazard ratio 1·21 95% BCI 1·08 to 1·36), with a probability of superiority greater than 0·999, meeting the prespecified superiority threshold of 0·99. For the hospital admission or death outcome, the estimated rate was 6·8% (95% BCI 4·1 to 10·2) in the budesonide group versus 8·8% (5·5 to 12·7) in the usual care group (estimated absolute difference 2·0% 95% BCI –0·2 to 4·5; odds ratio 0·75 95% BCI 0·55 to 1·03), with a probability of superiority 0·963, below the prespecified superiority threshold of 0·975. Two participants in the budesonide group and four in the usual care group had serious adverse events (hospital admissions unrelated to COVID-19).
Inhaled budesonide improves time to recovery, with a chance of also reducing hospital admissions or deaths (although our results did not meet the superiority threshold), in people with COVID-19 in the community who are at higher risk of complications.
National Institute of Health Research and United Kingdom Research Innovation.
Theoretical models of portfolio choice that incorporate ambiguity predict that investors’ propensity to invest in equities is reduced when ambiguity in the stock market increases. Although this ...hypothesis stems from the extant theoretical literature, there is no empirical work examining whether it is supported in the data. We test this hypothesis, measuring participation using equity fund flows and ambiguity with dispersion in analyst forecasts about aggregate returns. Our results confirm this hypothesis, as we show that, controlling for other factors that affect flows, increases in ambiguity are associated with outflows from equity funds. Moreover, using data from the Survey of Consumer Finances, we find that increases in ambiguity significantly reduce the likelihood that the average household invests in equities.
Maximally predictable currency portfolios Harris, Richard D.F.; Shen, Jian; Yilmaz, Fatih
Journal of international money and finance,
November 2022, 2022-11-00, Volume:
128
Journal Article
Peer reviewed
Open access
•We estimate the maximally predictable portfolio (MPP) for the G10 currencies.•We use the lagged principal components of exchange rates as predictors.•The MPP outperforms the equal-weighted and ...momentum portfolios.•It has a higher Sharpe ratio and terminal value, and lower maximum drawdown.•The MPP performs particularly well since the 2008 financial crises.
We investigate the predictability of the G10 currencies with respect to lagged currency returns from the perspective of a U.S. investor, using the maximally predictable portfolio (MPP) approach of Lo and MacKinlay (1997). We show that, out-of-sample, the MPP yields a higher Sharpe ratio, higher cumulative return and lower maximum drawdown than both a naïve equal-weighted portfolio of the currencies and an equal-weighted portfolio of momentum trading strategies, and that a mean–variance investor would be willing to pay a performance fee to switch from the naïve and momentum portfolios to the MPP. The MPP has performed particularly well since the 2008 financial crisis, in contrast with the momentum portfolio, the value of which declined significantly over this period. Our results are robust to the estimation window length, the type and level of portfolio weight constraints and transaction costs.
Systematic extreme downside risk Harris, Richard D.F.; Nguyen, Linh H.; Stoja, Evarist
Journal of international financial markets, institutions & money,
07/2019, Volume:
61
Journal Article
Peer reviewed
Open access
•We propose two new systematic tail risk measures.•Both tail risk measures are associated with a significantly positive risk premium.•We examine the relevance for investors of the tail risk premium ...over different horizons.
We propose new systematic tail risk measures constructed using two different approaches. The first is a non-parametric measure that captures the tendency of a stock to crash at the same time as the market, while the second is based on the sensitivity of stock returns to innovations in market crash risk. Both tail risk measures are associated with a significantly positive risk premium after controlling for other measures of downside risk, including downside beta, coskewness and cokurtosis. Using the new measures, we examine the relevance for investors of the tail risk premium over different horizons.
Bitcoin replication using machine learning Harris, Richard D.F.; Mazibas, Murat; Rambaccussing, Dooruj
International review of financial analysis,
05/2024, Volume:
93
Journal Article
Peer reviewed
Open access
Cryptocurrencies are characterized by high volatility and low correlations with traditional asset classes, and present an intriguing investment opportunity. However, their inherent risks and ...regulatory uncertainties make direct investment challenging for many investors. This paper addresses this challenge by proposing a replication framework that employs machine learning to create synthetic portfolios that replicate the risk-adjusted return profile and diversification benefits of Bitcoin, by far the largest cryptocurrency by market share. We show that the synthetic portfolios offer a compelling alternative to direct investment in Bitcoin, delivering superior risk-adjusted returns net of trading costs while mitigating the risks that are associated with holding Bitcoin directly. Furthermore, the synthetic portfolios provide better diversification benefits and lower tail risk.
•We replicate the return distribution of Bitcoin using conventional assets.•We construct the replicating portfolios using machine learning.•We compare machine learning with conventional replication methods.•We evaluate the risk-adjusted return performance of the replicating portfolios.•We evaluate the diversification benefits of the replicating portfolios.
•We show that the gold price is cointegrated with fundamental variables and exchange rates.•We estimate the associated error correction model (ECM).•We use the ECM to derive an exchange rate free ...gold price index.•We show that the index reflects the role of gold as a safe haven asset in a way that the gold price does not.
In this paper, we propose a gold price index that enables market participants to separate the change in the ‘intrinsic’ value of gold from changes in global exchange rates. The index is a geometrically weighted average of the price of gold denominated in different currencies, with weights that are proportional to the market power of each country in the global gold market. Market power is defined as the impact that a change in a country’s exchange rate has on the price of gold expressed in other currencies. We use principal components analysis to reduce the set of global exchange rates to four currency ‘blocs’ representing the U.S. dollar, the euro, the commodity currencies and the Asian currencies, respectively. We estimate the weight of each currency bloc in the index in an error correction framework using a broad set of variables to control for the unobserved intrinsic value. We show that the resulting index is less volatile than the USD price of gold and, in contrast with the USD price of gold, has a strong negative relationship with global equities and a strong positive relationship with the VIX index, both of which underline the role of gold as a safe haven asset.
Azithromycin, an antibiotic with potential antiviral and anti-inflammatory properties, has been used to treat COVID-19, but evidence from community randomised trials is lacking. We aimed to assess ...the effectiveness of azithromycin to treat suspected COVID-19 among people in the community who had an increased risk of complications.
In this UK-based, primary care, open-label, multi-arm, adaptive platform randomised trial of interventions against COVID-19 in people at increased risk of an adverse clinical course (PRINCIPLE), we randomly assigned people aged 65 years and older, or 50 years and older with at least one comorbidity, who had been unwell for 14 days or less with suspected COVID-19, to usual care plus azithromycin 500 mg daily for three days, usual care plus other interventions, or usual care alone. The trial had two coprimary endpoints measured within 28 days from randomisation: time to first self-reported recovery, analysed using a Bayesian piecewise exponential, and hospital admission or death related to COVID-19, analysed using a Bayesian logistic regression model. Eligible participants with outcome data were included in the primary analysis, and those who received the allocated treatment were included in the safety analysis. The trial is registered with ISRCTN, ISRCTN86534580.
The first participant was recruited to PRINCIPLE on April 2, 2020. The azithromycin group enrolled participants between May 22 and Nov 30, 2020, by which time 2265 participants had been randomly assigned, 540 to azithromycin plus usual care, 875 to usual care alone, and 850 to other interventions. 2120 (94%) of 2265 participants provided follow-up data and were included in the Bayesian primary analysis, 500 participants in the azithromycin plus usual care group, 823 in the usual care alone group, and 797 in other intervention groups. 402 (80%) of 500 participants in the azithromycin plus usual care group and 631 (77%) of 823 participants in the usual care alone group reported feeling recovered within 28 days. We found little evidence of a meaningful benefit in the azithromycin plus usual care group in time to first reported recovery versus usual care alone (hazard ratio 1·08, 95% Bayesian credibility interval BCI 0·95 to 1·23), equating to an estimated benefit in median time to first recovery of 0·94 days (95% BCI −0·56 to 2·43). The probability that there was a clinically meaningful benefit of at least 1·5 days in time to recovery was 0·23. 16 (3%) of 500 participants in the azithromycin plus usual care group and 28 (3%) of 823 participants in the usual care alone group were hospitalised (absolute benefit in percentage 0·3%, 95% BCI −1·7 to 2·2). There were no deaths in either study group. Safety outcomes were similar in both groups. Two (1%) of 455 participants in the azothromycin plus usual care group and four (1%) of 668 participants in the usual care alone group reported admission to hospital during the trial, not related to COVID-19.
Our findings do not justify the routine use of azithromycin for reducing time to recovery or risk of hospitalisation for people with suspected COVID-19 in the community. These findings have important antibiotic stewardship implications during this pandemic, as inappropriate use of antibiotics leads to increased antimicrobial resistance, and there is evidence that azithromycin use increased during the pandemic in the UK.
UK Research and Innovation and UK Department of Health and Social Care.
In this article, we develop one‐ and two‐component Markov regime‐switching conditional volatility models based on the intraday range and evaluate their performance in forecasting the daily volatility ...of the S&P 500 Index. We compare the performance of the models with that of several well‐established return‐ and range‐based volatility models, namely EWMA, GARCH, and FIGARCH models, the Markov regime‐switching GARCH model, the hybrid EWMA model, and the CARR model. We evaluate the in‐sample goodness of fit and out‐of‐sample forecast performance of the models using a comprehensive set of statistical and economic loss functions. To assess the statistical performance of the models, we use mean error metrics, directional predictive ability tests, forecast evaluation regressions, and pairwise and joint tests; and to appraise the economic performance of the models, we use value at risk coverage tests and risk management loss functions. We show that the proposed range‐based Markov switching conditional volatility models produce more accurate out‐of‐sample forecasts, contain more information about true volatility, and exhibit similar or better performance when used for the estimation of value at risk. Our results are robust to the choice of volatility proxy, estimation sample size, out‐of‐sample evaluation period, and alternative error distributions.
Average tail risk and aggregate stock returns Dai, Yingtong; Harris, Richard D.F.
Journal of international financial markets, institutions & money,
January 2023, 2023-01-00, Volume:
82
Journal Article
Peer reviewed
Open access
We investigate the role of the average risk across stocks in predicting subsequent market returns using measures of risk that capture the higher moments of the return distribution including variance, ...skewness and kurtosis, as well as measures of tail risk that combine these. We find that average tail risk has statistically and economically significant predictive ability for market returns, even after controlling for market tail risk, suggesting that average idiosyncratic tail risk contains information about future returns. Average tail risk dominates other measures of average risk that have been documented in the literature, such as variance and skewness. Our results are robust to the inclusion of control variables that capture business cycle effects, and to the use of different measures of tail risk.
•We investigate the role of the average risk across stocks in predicting subsequent market returns.•As risk measures, we consider variance, skewness, kurtosis and value at risk.•Average tail risk has significant predictive ability after controlling for market tail risk.•Average tail risk dominates the other measures of average risk.
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