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Dynamic Portfolio Investment with Changing Economic States
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Dynamic Portfolio Investment with Changing Economic States

A special issue of Journal of Risk and Financial Management (ISSN 1911-8074). This special issue belongs to the section "Financial Markets".

Deadline for manuscript submissions: closed (15 July 2022) | Viewed by 14224

Special Issue Editors

Prof. Dr. Yonggan Zhao

E-Mail Website
Guest Editor
Faculty of Management, Rowe School of Business, Dalhousie University, Halifax, NS B3H 4R2, Canada
Interests: dynamic stochastic optimization; asset pricing and investment; risk management; credit rating models
Special Issues, Collections and Topics in MDPI journals
Prof. Dr. Leonard MacLean

E-Mail Website
Guest Editor
Faculty of Management, Rowe School of Business, Dalhousie University, Halifax, NS B3H 4R2, Canada
Interests: optimal capital growth investing; stochastic dominance of portfolio returns; consistent risk measures; covariance complexity in returns estimation

Special Issue Information

Dear Colleagues,

Modern portfolio theory sets forth a methodology for designing optimal investment strategies given an investor’s risk aversion. However, the theory does not provide guidance on how to construct a portfolio that utilizes information about the changing investment economy over time. Empirical evidence shows that optimal investment strategies that are adaptive to the financial market economy are superior to a simple portfolio investment strategy. One versatile mathematical model which can be used to capture market dynamics is a hidden Markov process in which each of the states can be regarded as an instance of the investment economy. Other approaches such as shock models with hedging and Bayesian models are also attractive.

In this special issue, we are going to publish cutting-edge research that focuses on portfolio investment strategies with changing investment conditions. Specifically, we are very interested in papers that address the following areas:

  • Methodological papers that focus on time-consistent risk measures for portfolio investment over time.
  • Pricing models which capture changing economic conditions.
  • Factor investment strategies.
  • Empirical implementation of popular investment models.
  • Dynamic portfolio performance analysis

Please write to one of the guest editors for the suitability of any other research topics for publication in this special issue.

Prof. Dr. Yonggan Zhao
Prof. Dr. Leonard MacLean
Guest Editors

Manuscript Submission Information

Manuscripts should be submitted online at www.mdpi.com by registering and logging in to this website. Once you are registered, click here to go to the submission form. Manuscripts can be submitted until the deadline. All submissions that pass pre-check are peer-reviewed. Accepted papers will be published continuously in the journal (as soon as accepted) and will be listed together on the special issue website. Research articles, review articles as well as short communications are invited. For planned papers, a title and short abstract (about 100 words) can be sent to the Editorial Office for announcement on this website.

Submitted manuscripts should not have been published previously, nor be under consideration for publication elsewhere (except conference proceedings papers). All manuscripts are thoroughly refereed through a single-blind peer-review process. A guide for authors and other relevant information for submission of manuscripts is available on the Instructions for Authors page. Journal of Risk and Financial Management is an international peer-reviewed open access monthly journal published by MDPI.

Please visit the Instructions for Authors page before submitting a manuscript. The Article Processing Charge (APC) for publication in this open access journal is 1400 CHF (Swiss Francs). Submitted papers should be well formatted and use good English. Authors may use MDPI's English editing service prior to publication or during author revisions.

Keywords

  • Portfolio Selection and Portfolio Management
  • Mean-Variance Analysis
  • Value at Risk
  • Hidden Markov Process
  • Factor Investing Models
  • Stochastic Dynamic Optimization

Published Papers (6 papers)

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Research

23 pages, 3820 KiB  
Article
Safe-Haven Currencies as Defensive Assets in Global Stocks Portfolios: A Reassessment of the Empirical Evidence (1999–2022)
by Marco Tronzano
J. Risk Financial Manag. 2023, 16(5), 273; https://doi.org/10.3390/jrfm16050273 - 15 May 2023
Viewed by 1303
Abstract
This paper reassessed the hedging properties of four major safe-haven currencies (US dollar, Swiss franc, euro, yen) in international stock portfolios covering most representative world macroeconomic areas. The main contribution to the existing literature is the emphasis on optimal hedging and asset-allocation strategies. [...] Read more.
This paper reassessed the hedging properties of four major safe-haven currencies (US dollar, Swiss franc, euro, yen) in international stock portfolios covering most representative world macroeconomic areas. The main contribution to the existing literature is the emphasis on optimal hedging and asset-allocation strategies. A further distinguishing feature is an accurate comparison, inside a multivariate framework, between value-at-risk simulations assuming equal or optimal asset weights in hedged global stock portfolios. The US dollar stands out as the best safe-haven currency, while adding the US currency to single-hedged global stock portfolios including either the Swiss franc or the euro yields smooth risk profiles during major financial crises, and average risk indicators lower than that of a benchmark fully hedged portfolio. Full article
(This article belongs to the Special Issue Dynamic Portfolio Investment with Changing Economic States)
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32 pages, 458 KiB  
Article
Net Impact of COVID-19 on REIT Returns
by Yongpei Cai and Kuan Xu
J. Risk Financial Manag. 2022, 15(8), 359; https://doi.org/10.3390/jrfm15080359 - 12 Aug 2022
Cited by 8 | Viewed by 3926
Abstract
Using an extended Fama–French model for REIT returns, we examine how the net impact of the COVID-19 pandemic differs from that of recessions. We find that, as anticipated, recessions have a negative net impact on office and residential REIT returns but that the [...] Read more.
Using an extended Fama–French model for REIT returns, we examine how the net impact of the COVID-19 pandemic differs from that of recessions. We find that, as anticipated, recessions have a negative net impact on office and residential REIT returns but that the COVID-19 pandemic has a positive net influence on industrial REIT returns because of e-commerce and the demand for storage, distribution, and shipping. Contrary to what we anticipated, there are no negative net effects of the COVID-19 pandemic on office and residential REIT returns, perhaps caused by both existing office and residential leases, the percentage rent clause for commercial properties, and the grace period for residential properties during the COVID-19 pandemic. In contrast to moving solely during recessions and the COVID-19 pandemic, we find that retail REIT returns fluctuate along with ongoing macro/asset-pricing conditions throughout the boom and bust cycle. Full article
(This article belongs to the Special Issue Dynamic Portfolio Investment with Changing Economic States)
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25 pages, 1318 KiB  
Article
A Generalized Entropy Approach to Portfolio Selection under a Hidden Markov Model
by Leonard MacLean, Lijun Yu and Yonggan Zhao
J. Risk Financial Manag. 2022, 15(8), 337; https://doi.org/10.3390/jrfm15080337 - 30 Jul 2022
Cited by 2 | Viewed by 1535
Abstract
This paper develops a dynamic portfolio selection model incorporating economic uncertainty for business cycles. It is assumed that the financial market at each point in time is defined by a hidden Markov model, which is characterized by the overall equity market returns and [...] Read more.
This paper develops a dynamic portfolio selection model incorporating economic uncertainty for business cycles. It is assumed that the financial market at each point in time is defined by a hidden Markov model, which is characterized by the overall equity market returns and volatility. The risk associated with investment decisions is measured by the exponential Rényi entropy criterion, which summarizes the uncertainty in portfolio returns. Assuming asset returns are projected by a regime-switching regression model on the two market risk factors, we develop an entropy-based dynamic portfolio selection model constrained with the wealth surplus being greater than or equal to the shortfall over a target and the probability of shortfall being less than or equal to a specified level. In the empirical analysis, we use the select sector ETFs to test the asset pricing model and examine the portfolio performance. Weekly financial data from 31 December 1998 to 30 December 2018 is employed for the estimation of the hidden Markov model including the asset return parameters, while the out-of-sample period from 3 January 2019 to 30 April 2022 is used for portfolio performance testing. It is found that, under both the empirical Sharpe and return to entropy ratios, the dynamic portfolio under the proposed strategy is much improved in contrast with mean variance models. Full article
(This article belongs to the Special Issue Dynamic Portfolio Investment with Changing Economic States)
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24 pages, 1563 KiB  
Article
Optimal Portfolio Allocation between Global Stock Indexes and Safe Haven Assets: Gold versus the Swiss Franc (1999–2021)
by Marco Tronzano
J. Risk Financial Manag. 2022, 15(6), 241; https://doi.org/10.3390/jrfm15060241 - 27 May 2022
Cited by 4 | Viewed by 2315
Abstract
This paper contributes to the literature on safe haven assets, analyzing gold and the Swiss Franc’s defensive properties inside various global stocks portfolios. The analysis relies on monthly data extending over the last two decades. Drawing on Multivariate Garch DCC models, the hedging [...] Read more.
This paper contributes to the literature on safe haven assets, analyzing gold and the Swiss Franc’s defensive properties inside various global stocks portfolios. The analysis relies on monthly data extending over the last two decades. Drawing on Multivariate Garch DCC models, the hedging effectiveness of bivariate Swiss Franc-hedged portfolios is found to be notably higher than that of gold-hedged portfolios. Value-at-Risk simulations, assuming equal or “optimal” portfolio weights, confirm these results inside a multivariate asset framework, while a regression approach with quantile dummies provides further support in this regard. Since the better hedge and safe haven properties of the Swiss Franc are likely to persist in the future, the main policy implication of the paper concerns asset allocation strategies giving relatively more weight to the Swiss currency in global stock portfolios. Full article
(This article belongs to the Special Issue Dynamic Portfolio Investment with Changing Economic States)
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16 pages, 894 KiB  
Article
Mean–Variance Portfolio Efficiency under Leverage Aversion and Trading Impact
by Chanaka Edirisinghe and Jaehwan Jeong
J. Risk Financial Manag. 2022, 15(3), 98; https://doi.org/10.3390/jrfm15030098 - 23 Feb 2022
Cited by 2 | Viewed by 2209
Abstract
This paper addresses the optimal rebalancing problem of a long–short portfolio with high net asset value under trading impact losses. The fund manager may employ leveraging as a tool to increase portfolio returns. However, to mitigate potential leverage risks, frequent rebalancing may become [...] Read more.
This paper addresses the optimal rebalancing problem of a long–short portfolio with high net asset value under trading impact losses. The fund manager may employ leveraging as a tool to increase portfolio returns. However, to mitigate potential leverage risks, frequent rebalancing may become necessary, which leads to significant slippage losses that dampen portfolio performance ex post. We consider the problem in an integrated framework by incorporating trading impact and leverage restrictions ex ante within a mean–variance framework, where leverage control is imposed using a chance constraint. The resulting mean–variance–leverage optimization model (MVL) is non-convex, and we develop an efficient scheme to obtain the optimal portfolio. We investigate how portfolio leverage modifies the MV efficient frontier in the presence of trading impact, and highlight the significant outperformance of the proposed model relative to the standard mean–variance model. Increased target means require less restrictions on leverage, which result in higher rates of slippage losses. Our analysis supports the notion that leverage restrictions contribute to choosing high beta assets, even in the presence of trading impact. Full article
(This article belongs to the Special Issue Dynamic Portfolio Investment with Changing Economic States)
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17 pages, 364 KiB  
Article
Optimal Allocation of Retirement Portfolios
by Kevin Maritato, Morton Lane, Matthew Murphy and Stan Uryasev
J. Risk Financial Manag. 2022, 15(2), 65; https://doi.org/10.3390/jrfm15020065 - 01 Feb 2022
Viewed by 2209
Abstract
A retiree with a savings account balance, but without a pension, is confronted with an important investment decision that has to satisfy two conflicting objectives. Without a pension, the function of the savings is to provide post-employment income to the retiree. At the [...] Read more.
A retiree with a savings account balance, but without a pension, is confronted with an important investment decision that has to satisfy two conflicting objectives. Without a pension, the function of the savings is to provide post-employment income to the retiree. At the same time, most retirees want to leave an estate to their heirs. Guaranteed income can be acquired by investing in an annuity. However, that decision takes funds away from investment alternatives that might grow the estate. The decision is made even more complicated because one does not know how long one will live. A long life expectancy may require more annuities, and a short life expectancy could promote more risky investments. However there are very mixed opinions about both strategies. A framework has been developed to assess consequences and the trade-offs of alternative investment strategies. We propose a stochastic programming model to frame this complicated problem. The objective is to maximize expected estate value, subject to cash outflow constraints. The model is motivated by the Markowitz mean-variance approach, but with risk measured by CVaR and additional sophisticated constraints. The cash outflow shortages are penalized in the objective function of the problem. We use the kernel method to build position adjustment functions that control how much is invested in each asset. These adjustments nonlinearly depend upon asset returns in previous years. A case study was conducted using two variations of the model. The parameters used in this case study correspond to a typical retirement situation. The case study shows that if the market forecasts are pessimistic, it is optimal to invest in an annuity. The case study results, codes, and data are posted on our website. Full article
(This article belongs to the Special Issue Dynamic Portfolio Investment with Changing Economic States)
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