Optimal Investment Under Transaction Costs: A Threshold Rebalanced Portfolio Approach

We study optimal investment in a financial market having a finite number of assets from a signal processing perspective. We investigate how an investor should distribute capital over these assets and when he should reallocate the distribution of the funds over these assets to maximize the cumulative wealth over any investment period. In particular, we introduce a portfolio selection algorithm that maximizes the expected cumulative wealth in i.i.d. two-asset discrete-time markets where the market levies proportional transaction costs in buying and selling stocks. We achieve this using "threshold rebalanced portfolios", where trading occurs only if the portfolio breaches certain thresholds. Under the assumption that the relative price sequences have log-normal distribution from the Black-Scholes model, we evaluate the expected wealth under proportional transaction costs and find the threshold rebalanced portfolio that achieves the maximal expected cumulative wealth over any investment period. Our derivations can be readily extended to markets having more than two stocks, where these extensions are pointed out in the paper. As predicted from our derivations, we significantly improve the achieved wealth over portfolio selection algorithms from the literature on historical data sets.Comment: Submitted to IEEE Transactions on Signal Processin

The Eco-Efficiency Premium Puzzle

There exists a widespread consensus among mainstream academics and investors that socially responsible investing (SRI) leads to inferior, rather than superior, portfolio performance. Using Innovest’s well-established corporate ecoefficiency scores, we provide evidence to the contrary. We compose two equity portfolios that differ in eco-efficiency characteristics and find that our highranked portfolio provided substantially higher average returns compared to its low-ranked counterpart over the period 1995-2003. Using a wide range of performance attribution techniques to address common methodological concerns, we show that this performance differential cannot be explained by differences in market sensitivity, investment style, or industry-specific components. We finally investigate whether this eco-efficiency premium puzzle withstands the inclusion of transaction costs scenarios, and evaluate how excess returns can be earned in a practical setting via a best-in-class stock selection strategy. The results remain significant under all levels of transactions costs, thus suggesting that the incremental benefits of SRI can be substantial

Risk, Return and Portfolio Allocation under Alternative Pension Arrangements with Imperfect Financial Markets

This paper uses stochastic simulations on calibrated models to assess the steady state impact of different pension arrangements in an environment where financial markets are less than perfect. Surprisingly little is known about the optimal split between funded and unfunded systems when there are sources of uninsurable risk that are allocated in different ways by different types of pension system and where there are imperfections in financial markets (eg transactions costs or adverse selection) . This paper calculates the expected welfare of agents in different economies where in the steady state the importance of unfunded, state pensions differs. We estimate how the optimal level of unfunded, state pensions depends on rate of return and income risks and also upon the actuarial fairness of annuity contracts. We focus on the case of Japan where aging is rapid and unfunded pensions are currently generous.Pensions; portfolio allocation, demographics; annuities; risk-sharing

Agency Costs in Law-Firm Selection: Are Companies Under-Spending on Counsel?

A growing body of literature examines whether corporate clients derive sufficient value from the law firms that they engage. Yet little attention has been paid to whether clients optimally select among law firms in the first place. One entry-point is to identify discrepancies in the quality of counsel selected by different corporate clients for the very same work. Using a large sample of loans, this Article finds that major U.S. public companies select lower-ranked law firms for their financing transactions than do private equity-owned companies, controlling for various deal characteristics. While some of this discrepancy can be attributed to value-maximizing behavior, agency and other information problems within public companies may distort their choice of counsel. Contrary to the thrust of existing commentary, U.S. public companies may well be spending too little on outside counsel

Asset securitisation as a risk management and funding tool : what does it hold in store for SMES?

The following chapter critically surveys the attendant benefits and drawbacks of asset securitisation on both financial institutions and firms. It also elicits salient lessons to be learned about the securitisation of SME-related obligations from a cursory review of SME securitisation in Germany as a foray of asset securitisation in a bank-centred financial system paired with a strong presence of SMEs in industrial production. JEL Classification: D81, G15, M2