Hedging Demand in Long-Term Asset Allocation With an Application to Carry Trade Strategies

2019 ◽  
Author(s):  
Ricardo Laborda Herrero ◽  
Jose Olmo
Keyword(s):  
Asset Allocation ◽  
Carry Trade ◽  
Hedging Demand

Hedging Demand in Long-Term Asset Allocation with an Application to Carry Trade Strategies*

2020 ◽  
Author(s):  
Ricardo Laborda ◽  
Jose Olmo
Keyword(s):  
Asset Allocation ◽  
Closed Form Expression ◽  
Relative Risk Aversion ◽  
Carry Trade ◽  
Policy Rule ◽  
Form Expression ◽  
Risky Assets ◽  
Portfolio Policy ◽  
Hedging Demand

Abstract We derive a closed-form expression for the mean and marginal hedging demand on risky assets in long-term asset allocation problems for individuals with constant relative risk aversion preferences. Our parametric portfolio policy rule accommodates an arbitrarily large number of state variables for predicting the state of nature and number of assets in the portfolio. The closed-form expression for the hedging demand is exact under polynomial specifications of the portfolio policy rule and a suitable approximation for unknown smooth parametric portfolio policy rules using Taylor expansions. The hedging demand on risky assets depends positively on the predictability of the risky asset and the persistence of the predictors, and negatively on the degree of investor’s relative risk aversion. We illustrate these insights empirically for a basket of currencies by showing the outperformance of rebalancing carry trade strategies over different investment horizons against a short-term (myopic) portfolio.

scholarly journals Sector Volatility Spillover and Economic Policy Uncertainty: Evidence from China’s Stock Market

Mathematics ◽  
2021 ◽  
Vol 9 (12) ◽  
pp. 1411
Author(s):  
Xiaqing Su ◽  
Zhe Liu
Keyword(s):  
Economic Policy ◽  
Stock Market ◽  
Asset Allocation ◽  
Policy Uncertainty ◽  
Volatility Spillover ◽  
Economic Policy Uncertainty ◽  
Long Run ◽  
Transmission Structure ◽  
Long Term Impact

Following generalized variance decomposition, we identify the transmission structure of financial shock among ten sectors in China. Then, we examine whether economic policy uncertainty (EPU) affects it through GARCH-MIDAS regression. We find that consumer discretionary, industrials, and materials sectors are systemically important industries during the sample period. Further research of dynamic analysis shows that each sector acts in a time-varying role in this structure. The results of the GARCH-MIDAS regression indicate that none of the selected EPU indexes has a significant long-term impact on the total volatility spillover of the inter-sector stock market in China. However, the EPUs do affect some sectors’ spillover indexes in the long run, and they are significantly heterogeneous. This paper can provide regulatory suggestions for policymakers and reasonable asset allocation and risk avoidance methods for investors.

DYNAMIC ASSET ALLOCATION FOR TARGET DATE FUNDS UNDER THE BENCHMARK APPROACH

2021 ◽  
pp. 1-26
Author(s):  
Jin Sun ◽  
Dan Zhu ◽  
Eckhard Platen
Keyword(s):  
Asset Allocation ◽  
Dynamic Asset Allocation ◽  
Growth Optimal Portfolio ◽  
Risky Assets ◽  
Target Date ◽  
Target Date Funds ◽  
Asset Allocations ◽  
Investment Choices ◽  
Glide Paths

ABSTRACT Target date funds (TDFs) are becoming increasingly popular investment choices among investors with long-term prospects. Examples include members of superannuation funds seeking to save for retirement at a given age. TDFs provide efficient risk exposures to a diversified range of asset classes that dynamically match the risk profile of the investment payoff as the investors age. This is often achieved by making increasingly conservative asset allocations over time as the retirement date approaches. Such dynamically evolving allocation strategies for TDFs are often referred to as glide paths. We propose a systematic approach to the design of optimal TDF glide paths implied by retirement dates and risk preferences and construct the corresponding dynamic asset allocation strategy that delivers the optimal payoffs at minimal costs. The TDF strategies we propose are dynamic portfolios consisting of units of the growth-optimal portfolio (GP) and the risk-free asset. Here, the GP is often approximated by a well-diversified index of multiple risky assets. We backtest the TDF strategies with the historical returns of the S&P500 total return index serving as the GP approximation.

scholarly journals The Currency Carry Trade: Selection Skill or Behavioral Bias

2016 ◽  
Vol 9 (9) ◽  
pp. 176
Author(s):  
Ian Hudson
Keyword(s):  
Interest Rate ◽  
Efficient Market Hypothesis ◽  
Arbitrage Pricing Theory ◽  
Carry Trade ◽  
Interest Rate Parity ◽  
Forward Premium ◽  
Investment Returns ◽  
Pricing Theory ◽  
Premium Puzzle

<p>Many attempts have been undertaken to solve the forward premium puzzle with little to no success. The global currency market is considered the most information efficient and transparent of all financial markets since it demonstrates a balance between over and under-reaction to information with remarkable consistency. The Efficient Market Hypothesis espouses investors cannot systematically outperform a benchmark since all investors have access to the same information. Therefore, the expected long-term rate of return for currencies is essentially zero. The Arbitrage Pricing Theory asserts investment returns are random. As such, traders cannot avail themselves of mispriced currencies. The assertion of Uncovered Interest Rate Parity is that bi-national interest rate variance is equal to the expected differential in exchange rates. This paper asks the following questions: does alpha persistence exist in currency carry trade funds or are its excess returns merely a collection of behavioral biases?</p>

Ambiguity aversion and experiential learning: implications for long-term savings decisions

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Bryan Foltice ◽  
Rachel Rogers
Keyword(s):  
Decision Making ◽  
Experiential Learning ◽  
Asset Allocation ◽  
Ambiguity Aversion ◽  
Sample Population ◽  
Allocation Decision ◽  
Content Type ◽  
Learning Modules ◽  
Return Data

PurposeThis paper evaluates potential methods for reducing ambiguity surrounding returns on equity to improve long-term savings decisions.Design/methodology/approachWe evaluate 221 undergraduate students in the US and first assess the degree of ambiguity aversion exhibited by individuals in the sample population as they decide between a risky (known probability) option and ambiguous (unknown probability) option pertaining to their chances of winning $0 or $1 in a hypothetical lottery. Similarly, we test whether sampling historical return data through learning modules influences long-term decision making regarding asset allocation within a retirement portfolio.FindingsAllowing participants to experience the underlying probability through sampling significantly influences behavior, as participants were more likely to select the ambiguous option after sampling. Here, we also find that participants who receive interactive learning modules – which require users to manually alter the asset allocation to produce a sample of historical return data based on the specific allocation entered in the model – increase their post-learning equity allocations by 10.1% more than individuals receiving static modules. Interestingly, we find no significant evidence of ambiguity aversion playing a role in the asset allocation decision.Originality/valueWe find that decision-making related to ambiguous and risky options can be substantially influenced by experiential learning. Our study supplements previous literature, providing a link between research on the effect of ambiguity on stock market participation and implementation of educational programs to improve the asset allocation decision for young adults.

Costs and liabilities of US public pension systems in a low-return environment

2020 ◽  
pp. 1-18
Author(s):  
Gang Chen ◽  
David Matkin ◽  
Hyewon Kang
Keyword(s):  
Asset Allocation ◽  
Simulation Method ◽  
Public Pension ◽  
Moderating Effects ◽  
Pension Systems ◽  
Long Term Effect ◽  
Unfunded Liabilities ◽  
Investment Returns ◽  
Investment Portfolios

Abstract In recent years, a growing number of capital market professionals have projected a low-return environment in US investment portfolios – where returns in most asset classes are expected to drop below historical rates. While these specific forecasts may not fully materialize, it is natural for cyclical investment markets to go through extended periods of lower returns, creating significant risks for public pension systems which rely on investment returns to sustain their long-term solvency and offset budgetary contributions. This paper uses a simulation method to examine the long-term effect of a low-return environment on the unfunded liabilities and contribution costs of US public pension systems while considering the moderating effects of asset allocation strategies, amortization approaches, and contribution policies.

scholarly journals Long-Term Strategic Asset Allocation: An Out-of-Sample Evaluation

2015 ◽  
Vol 61 (9) ◽  
pp. 2185-2202 ◽  
Author(s):  
Bart Diris ◽  
Franz Palm ◽  
Peter Schotman
Keyword(s):  
Asset Allocation ◽  
Strategic Asset Allocation ◽  
Out Of Sample
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