A Framework for Managing a Portfolio of Socially Responsible Investments

In this paper we present and illustrate using real-life data a framework for managing an investment portfolio in which the investment opportunities are described in terms of a set of attributes and part of this set is intended to capture the effects on society. Here we link with the emerging literature on SRI: Socially Responsible Investment. Given the multifarious descriptions of the individual investment opportunities we show how these can be combined into portfolios with the same attributes at the portfolio level. Also we show how a manager can systematically be supported in the choice between different portfolio profiles. As part of the framework we use multi-criteria decision tools

Do Countries or Industries Explain Momentum in Europe?

The driving force behind the well-documented medium term momentumeffect in stock returns is subject of much debate. Empirical papersthat aim to find the determinants of this return continuation, seem tobe almost exclusively restricted to US stock markets. Consequently,regional effects have received little attention in these analyses.This paper contributes to the discussion by investigating the presenceof country and industry momentum in Europe and addressing the questionwhether individual stock momentum is subsumed by country or industrymomentum.We examine these issues by introducing a portfolio-basedregression approach, which allows to test hypotheses about theexistence and relative importance of multiple effects using standardstatistical techniques. While the traditional sorting techniques arenot suited to disentangle a multitude of possibly interrelated effects(e.g. momentum, value, and size), our method can be used even whenonly a moderate number of stocks are available. Our results suggestthat the positive expected excess returns of momentum strategies inEuropean stock markets are primarily driven by individual stockseffects, while industry momentum plays a less important role andcountry momentum is even weaker. These results are robust to theinclusion of value and size effects.portfolio selection;technology adoption;country risk;industry risk;momentum effect

Measuring Credit Spread Risk

It is widely known that the small but looming possibility of defaultrenders the expected return distribution for financial productscontaining credit risk to be highly skewed and fat tailed. In thispaper we apply recent techniques developed for incorporating theadditional risk faced by changes in swap spreads. Using data from theUS, UK, Germany, and Japan, we find that the risk faced from largespread widenings and tightenings is grossly underestimated. Estimationof swap spread risk is dramatically improved when the severity of thefat tails is measured and incorporated into current estimationtechniques.value-at-risk;Market Risk;backtesting;extreme Value theory;parametric distributions

Do Global Risk Factors Matter for International Cost of Capital Computations?

International financial markets are becoming integrated. Hence, globalrisk factor are increasingly important for portfolio selection andasset pricing. The recent empirical finance literature has confirmedthat both the global market portfolio and exchange rate risk factorsconstitute important determinants of asset returns. We show, however,that global risk factors do not importantly affect estimates of thecost of equity capital for a remarkably wide variety of companies. Weanalyze almost 3,300 stocks from nine industrialized countries overthe period 1980-1999. Incorporating global factors into cost ofcapital estimations leads to an adjustment of roughly 50 basis pointsper annum on average for the U.S. and 70 to 100 basis points for theother countries. Adjustments of this magnitude easily fall inside themargin of error associated with actual cost of capital computations.Specifically for U.S. companies, the amendment of the cost of capitalestimate is generally very small. This suggests that global riskfactors do not really matter for computing the cost of capital of U.S.firms.capital budgeting;cost of equity capital;exchange rate risk;valuation

Do Countries or Industries Explain Momentum in Europe?

The driving force behind the well-documented medium term momentum effect in stock returns is subject of much debate. Empirical papers that aim to find the determinants of this return continuation, seem to be almost exclusively restricted to US stock markets. Consequently, regional effects have received little attention in these analyses. This paper contributes to the discussion by investigating the presence of country and industry momentum in Europe and addressing the question whether individual stock momentum is subsumed by country or industry momentum.We examine these issues by introducing a portfolio-based regression approach, which allows to test hypotheses about the existence and relative importance of multiple effects using standard statistical techniques. While the traditional sorting techniques are not suited to disentangle a multitude of possibly interrelated effects (e.g. momentum, value, and size), our method can be used even when only a moderate number of stocks are available. Our results suggest that the positive expected excess returns of momentum strategies in European stock markets are primarily driven by individual stocks effects, while industry momentum plays a less important role and country momentum is even weaker. These results are robust to the inclusion of value and size effects

Do Macroeconomic Announcements Cause Asymetric Volatility?

In this paper we study the impact of macroeconomic news announcementson the conditional volatility of stock and bond returns. Using dailyreturns on the S&P 500 index, the NASDAQ index, and the 1 and 10 yearU.S. Treasury bonds, for January 1982 - August 2001, some interestingresults emerge. Announcement shocks appear to have a strong impact onthe (dynamics of) bond and stock market volatility. Our resultsprovide empirical evidence thatasymmetric volatility in the Treasurybond market can be largely explained by these macroeconomicannouncement shocks. This suggests that the asymmetric volatilityfound in government bond markets are likely due to misspecification ofthe volatility model. After including macroeconomic announcements intothe model, the asymmetry disappears. Becausefirm-specific news is themost important source of information in the stock market, theasymmetries in stock volatility do not disappear after incorporatingmacroeconomic announcements into the volatility model.Asymmetry;Announcement Effects;Multivariate GARCH;Stock and Bond Market;Time-Varying Covariances

Measuring Credit Spread Risk

It is widely known that the small but looming possibility of default renders the expected return distribution for financial products containing credit risk to be highly skewed and fat tailed. In this paper we apply recent techniques developed for incorporating the additional risk faced by changes in swap spreads. Using data from the US, UK, Germany, and Japan, we find that the risk faced from large spread widenings and tightenings is grossly underestimated. Estimation of swap spread risk is dramatically improved when the severity of the fat tails is measured and incorporated into current estimation techniques

Survival, Look-Ahead Bias and the Persistence in Hedge Fund Performance

Hedge funds databases are typically subject to high attrition ratesbecause of fund termination and self-selection. Even when all fundsare included up to their last available return, one cannot preventthat ex post conditioning biases a.ect standard estimates ofperformance persistence. In this paper we analyze the persistence inthe performance of U.S. hedge funds taking into account look-aheadbias (multi-period sampling bias). To do so, we model attrition ofhedge funds and analyze how it depends upon historical performance.Next, we use a weighting procedure that eliminates look-ahead bias inmeasures for performance persistence. The results show that the impactof look-ahead bias is quite severe, even though positive and negativesurvival-related biases are sometimes suggested to cancel out. Athorizons of one and four quarters, we find clear evidence of positivepersistence in hedge fund returns, also after correcting forinvestment style. At the two-year horizon, past winning funds tend toperform poorly in the future.survival;performance measurement;investments;individual profiles;hedge funds

Do Global Risk Factors Matter for International Cost of Capital Computations?

International financial markets are becoming integrated. Hence, global risk factor are increasingly important for portfolio selection and asset pricing. The recent empirical finance literature has confirmed that both the global market portfolio and exchange rate risk factors constitute important determinants of asset returns. We show, however, that global risk factors do not importantly affect estimates of the cost of equity capital for a remarkably wide variety of companies. We analyze almost 3,300 stocks from nine industrialized countries over the period 1980-1999. Incorporating global factors into cost of capit

The Relevance of MCDM for Financial Decisions

For people working in finance, either in academia or in practice or in both, the combination of ?finance? and ?multiple criteria? is not obvious. However, we believe that many of the tools developed in the field of MCDM can contribute both to the quality of the financial economic decision making process and to the quality of the resulting decisions. In this paper we answer the question why financial decision problems should be considered as multiple criteria decision problems and should be treated accordingly