Essays on International Asset Allocation and Pricing

Thesis (Ph.D.)--University of Washington, 2016-06

Does lending behaviour of banks in emerging economies vary by ownership? Evidence from the Indian banking sector

While much has been discussed about the relationship between ownership and financial performance of banks in emerging markets, literature about cross-ownership differences in credit market behaviour of banks in emerging economies is sparse. Using a portfolio choice model and bank-level data from India for 9 years (1995–96 to 2003–04), we examine banks’ behaviour in the context of credit markets of an emerging market economy. Our results indicate that, in India, the data for the domestic banks fit well the aforementioned portfolio-choice model, especially for private banks, but the model cannot explain the behaviour of foreign banks. In general, allocation of assets between risk-free government securities and risky credit is affected by past allocation patterns, stock exchange listing (for private banks), risk averseness of banks, regulations regarding treatment of NPA, and ability of banks to recover doubtful credit. It is also evident that banks deal with changing levels of systematic risk by altering the ratio of securitized to non-securitized credit.

Wealth shocks, credit-supply shocks, and asset allocation:evidence from household and firm portfolios

We use a unique dataset with bank clients’ security holdings for all German banks to examine how macroeconomic shocks affect asset allocation preferences of households and non-financial firms. Our analysis focuses on two alternative mechanisms which can influence portfolio choice: wealth shocks, which are represented by the sovereign debt crisis in the Euro area, and credit-supply shocks which arise from reductions in borrowing abilities during bank distress. While households with large holdings of securities from stressed Euro area countries (Greece, Ireland, Italy, Portugal, and Spain) de-crease the degree of concentration in their security portfolio as a result of the Euro area crisis, non-financial firms with similar levels of holdings from stressed Euro area countries do not. Credit-supply shocks at the bank level result in lower concentration, for both households and non-financial corporations. Only shocks to corporate credit bear ramifications on bank clients’ portfolio concentration. Our results are robust to falsification tests, and instrumental variables estimation.

Wealth shocks, credit-supply shocks, and asset allocation:evidence from household and firm portfolios

We use a unique dataset with bank clients’ security holdings for all German banks to examine how macroeconomic shocks affect asset allocation preferences of households and non-financial firms. Our analysis focuses on two alternative mechanisms which can influence portfolio choice: wealth shocks, which are represented by the sovereign debt crisis in the Eurozone, and credit-supply shocks which arise from reductions in borrowing abilities during bank distress. We document het- erogeneous responses to these two types of shocks. While households with large holdings of secu- rities from stressed Eurozone countries (Greece, Ireland, Italy, Portugal, and Spain) decrease the degree of concentration in their security portfolio as a result of the Eurozone crisis, non-financial firms with similar levels of holdings from stressed Eurozone countries do not. Credit-supply shocks at the bank level (caused by bank distress) result in lower concentration, for both households and non-financial corporations. We also show that only shocks to corporate credit bear ramifications on bank clients’ portfolio concentration, while shocks in retail credit are inconsequential. Our results are robust to falsification tests, propensity score matching techniques, and instrumental variables estimation.

Essays in asset price bubbles

This thesis studies the field of asset price bubbles. It is comprised of three independent chapters. Each of these chapters either directly or indirectly analyse the existence or implications of asset price bubbles. The type of bubbles assumed in each of these chapters is consistent with rational expectations. Thus, the kind of price bubbles investigated here are known as rational bubbles in the literature. The following describes the three chapters. Chapter 1: This chapter attempts to explain the recent US housing price bubble by developing a heterogeneous agent endowment economy asset pricing model with risky housing, endogenous collateral and defaults. Investment in housing is subject to an idiosyncratic risk and some mortgages are defaulted in equilibrium. We analytically derive the leverage or the endogenous loan to value ratio. This variable comes from a limited participation constraint in a one period mortgage contract with monitoring costs. Our results show that low values of housing investment risk produces a credit easing effect encouraging excess leverage and generates credit driven rational price bubbles in the housing good. Conversely, high values of housing investment risk produces a credit crunch characterized by tight borrowing constraints, low leverage and low house prices. Furthermore, the leverage ratio was found to be procyclical and the rate of defaults countercyclical consistent with empirical evidence. Chapter 2: It is widely believed that financial assets have considerable persistence and are susceptible to bubbles. However, identification of this persistence and potential bubbles is not straightforward. This chapter tests for price bubbles in the United States housing market accounting for long memory and structural breaks. The intuition is that the presence of long memory negates price bubbles while the presence of breaks could artificially induce bubble behaviour. Hence, we use procedures namely semi-parametric Whittle and parametric ARFIMA procedures that are consistent for a variety of residual biases to estimate the value of the long memory parameter, d, of the log rent-price ratio. We find that the semi-parametric estimation procedures robust to non-normality and heteroskedasticity errors found far more bubble regions than parametric ones. A structural break was identified in the mean and trend of all the series which when accounted for removed bubble behaviour in a number of regions. Importantly, the United States housing market showed evidence for rational bubbles at both the aggregate and regional levels. In the third and final chapter, we attempt to answer the following question: To what extend should individuals participate in the stock market and hold risky assets over their lifecycle? We answer this question by employing a lifecycle consumption-portfolio choice model with housing, labour income and time varying predictable returns where the agents are constrained in the level of their borrowing. We first analytically characterize and then numerically solve for the optimal asset allocation on the risky asset comparing the return predictability case with that of IID returns. We successfully resolve the puzzles and find equity holding and participation rates close to the data. We also find that return predictability substantially alter both the level of risky portfolio allocation and the rate of stock market participation. High factor (dividend-price ratio) realization and high persistence of factor process indicative of stock market bubbles raise the amount of wealth invested in risky assets and the level of stock market participation, respectively. Conversely, rare disasters were found to bring down these rates, the change being severe for investors in the later years of the life-cycle. Furthermore, investors following time varying returns (return predictability) hedged background risks significantly better than the IID ones.

Uncertainty aversion and the optmal choice of portfolio

In this paper we apply the theory of declsion making with expected utility and non-additive priors to the choice of optimal portfolio. This theory describes the behavior of a rational agent who i5 averse to pure 'uncertainty' (as well as, possibly, to 'risk'). We study the agent's optimal allocation of wealth between a safe and an uncertain asset. We show that there is a range of prices at which the agent neither buys not sells short the uncertain asset. In contrast the standard theory of expected utility predicts that there is exactly one such price. We also provide a definition of an increase in uncertainty aversion and show that it causes the range of prices to increase.

Evaluating the effectiveness of common structures in property portfolio construction

A good portfolio structure enables an investor to diversify more effectively and understand systematic influences on their performance. However, in the property market, the choice of structure is affected by data constraints and convenience. Using individual return data, this study tests the hypothesis that some common structures in the UK do not explain a significant amount about property returns. It is found that, in the periods studied, not all the structures were effective and, for the annual returns, no structures were significant in all periods. The results suggest that the drivers represented by the structures take some time to be reflected in individual property returns. They also confirm the results of other studies in finding property type a much stronger factor in explaining returns than regions.

Different risk measures: different portfolio compositions?

Traditionally, the measure of risk used in portfolio optimisation models is the variance. However, alternative measures of risk have many theoretical and practical advantages and it is peculiar therefore that they are not used more frequently. This may be because of the difficulty in deciding which measure of risk is best and any attempt to compare different risk measures may be a futile exercise until a common risk measure can be identified. To overcome this, another approach is considered, comparing the portfolio holdings produced by different risk measures, rather than the risk return trade-off. In this way we can see whether the risk measures used produce asset allocations that are essentially the same or very different. The results indicate that the portfolio compositions produced by different risk measures vary quite markedly from measure to measure. These findings have a practical consequence for the investor or fund manager because they suggest that the choice of model depends very much on the individual’s attitude to risk rather than any theoretical and/or practical advantages of one model over another.

Integrating technology roadmapping and portfolio management at the front-end of new product development

Many authors point out that the front-end of new product development (NPD) is a critical success factor in the NPD process and that numerous companies face difficulties in carrying it out appropriately. Therefore, it is important to develop new theories and proposals that support the effective implementation of this earliest phase of NPD. This paper presents a new method to support the development of front-end activities based on integrating technology roadmapping (TRM) and project portfolio management (PPM). This new method, called the ITP Method, was implemented at a small Brazilian high-tech company in the nanotechnology industry to explore the integration proposal. The case study demonstrated that the ITP Method provides a systematic procedure for the fuzzy front-end and integrates innovation perspectives into a single roadmap, which allows for a better alignment of business efforts and communication of product innovation goals. Furthermore, the results indicated that the method may also improve quality, functional integration and strategy alignment. (C) 2010 Elsevier Inc. All rights reserved.

The choice of the best among the shortest routes in transparent optical networks

This work introduces the problem of the best choice among M combinations of the shortest paths for dynamic provisioning of lightpaths in all-optical networks. To solve this problem in an optimized way (shortest path and load balance), a new fixed routing algorithm, named Best among the Shortest Routes (BSR), is proposed. The BSR`s performance is compared in terms of blocking probability and network utilization with Dijkstra`s shortest path algorithm and others algorithms proposed in the literature. The evaluated scenarios include several representative topologies for all-optical networking and different wavelength conversion architectures. For all studied scenarios, BSR achieved superior performance. (C) 2010 Elsevier B.V. All rights reserved.

A generalized multi-period mean-variance portfolio optimization with Markov switching parameters

In this paper, we deal with a generalized multi-period mean-variance portfolio selection problem with market parameters Subject to Markov random regime switchings. Problems of this kind have been recently considered in the literature for control over bankruptcy, for cases in which there are no jumps in market parameters (see [Zhu, S. S., Li, D., & Wang, S. Y. (2004). Risk control over bankruptcy in dynamic portfolio selection: A generalized mean variance formulation. IEEE Transactions on Automatic Control, 49, 447-457]). We present necessary and Sufficient conditions for obtaining an optimal control policy for this Markovian generalized multi-period meal-variance problem, based on a set of interconnected Riccati difference equations, and oil a set of other recursive equations. Some closed formulas are also derived for two special cases, extending some previous results in the literature. We apply the results to a numerical example with real data for Fisk control over bankruptcy Ill a dynamic portfolio selection problem with Markov jumps selection problem. (C) 2008 Elsevier Ltd. All rights reserved.

Substratum choice for nesting in male Nile tilapia Oreochromis niloticus

Four substrata were offered to groups of adult Nile tilapia Oreochromis niloticus (one male and two females) simultaneously: pure sand, a mixture of sand and shells, stones and no substratum. The results showed that males chose to dig nests in a lighter and more homogeneous substratum.

Australian political discourse: Pronominal choice in campaign speeches

The intention behind language used by candidates during an election campaign is to persuade voters to vote for a particular political party. Fundamental to the political arena is construction of identity, group membership and ways of talking about self, others, and the polarizing categories of 'us' and 'them'. This paper will investigate the pragmatics of pronominal choice and the way in which politicians construct and convey their own identities and those of their political opponents within political speeches. Taking six speeches by John Howard and Mark Latham across the course of the 2004 federal election campaign, I look at the ways in which pronominal choice indicates a shifting scope of reference to creat pragmatic effects and serve political functions.