Managing international portfolios with small capitalization stocks

In the context of an international portfolio diversification problem, we find that small capitalization equity portfolios become riskier in bear markets, i.e. display negative co-skewness with other stock indices and high co-kurtosis. Because of this feature, a power utility investor ought to hold a well-diversified portfolio, despite the high risk premium and Sharpe ratios offered by small capitalization stocks. On the contrary small caps command large optimal weights when the investor ignores variance risk, by incorrectly assuming joint normality of returns. The dominant factor in inducing such shifts in optimal weights is represented by the co-skewness, the predictable, time-varying covariance between returns and volatilities. We calculate that if an investor were to ignore co-skewness and co-kurtosis risk, he would suffer a certainty-equivalent reduction in utility equal to 300 basis points per year under the steady-state distribution for returns. Our results are qualitatively robust when both European and North American small caps are introduced in the analysis. Therefore this paper offers robust evidence that predictable covariances between means and variances of stock returns may have a first order effect on portfolio composition.Investments, Foreign ; Stocks

When Do Stop-Loss Rules Stop Losses?

Stop-loss rules-predetermined policies that reduce a portfolio's exposure after reaching a certain threshold of cumulative losses-are commonly used by retail and institutional in- vestors to manage the risks of their investments, but have also been viewed with some skep- ticism by critics who question their e±cacy. In this paper, we develop a simple framework for measuring the impact of stop-loss rules on the expected return and volatility of an arbitrary portfolio strategy, and derive conditions under which stop-loss rules add or subtract value to that portfolio strategy. We show that under the Random Walk Hypothesis, simple 0/1 stop-loss rules always decrease a strategy's expected return, but in the presence of momen- tum, stop-loss rules can add value. To illustrate the practical relevance of our framework, we provide an empirical analysis of a stop-loss policy applied to a buy-and-hold strategy in U.S. equities, where the stop-loss asset is U.S. long-term government bonds. Using monthly returns data from January 1950 to December 2004, we find that certain stop-loss rules add 50 to 100 basis points per month to the buy-and-hold portfolio during stop-out periods. By computing performance measures for several price processes, including a new regime- switching model that implies periodic "flights-to-quality", we provide a possible explanation for our empirical results and connections to the behavioral finance literature.Investments; Portfolio Management; Risk Management; Performance Attribution; Behavioral Finance

The Evolution of Coordination under Inertia

This paper models the phenomenon of inertia driven by individual strategy switching costs in a stochastic evolutionary context. Kandori, Mailath, and Rob's (1993) model of a finite population of agents repeatedly playing a 2x2 symmetric coordination game is extended to allow for such inertia. Taking noise to the limit, a number of new short- to medium-run equilibria emerge, centred around the mixed-strategy equilibrium. Thus, unusually, an evolutionary model is seen to provide some justification for the controversial concept of mixed-strategy equilibrium. However, Kandori, Mailath, and Rob's long-run selection of the risk-dominant equilibrium continues to hold, both under fixed-rate mutations and under state-dependent mutations driven by stochastic switching costs. The key to this is the satisfaction of Blume's (1999) "skew-symmetry" of the noise process, which is shown to be crucial even under simultaneous strategy revisions. In fact, the presence of the new short-run equilibria can under certain conditions serve to reduce the expected waiting time before the risk-dominant equilibrium is reached - an instance of Ellison's (2000) idea that evolution is more rapid when it can proceed via a series of small "steps" between extremes. This suggests inertia to be a surprisingly efficient phenomenon, and also serves to moderate the force of the Ellison (1993) critique of excessively long transition times in models with vanishing noise.

Transformation of stimulus correlations by the retina

Redundancies and correlations in the responses of sensory neurons seem to waste neural resources but can carry cues about structured stimuli and may help the brain to correct for response errors. To assess how the retina negotiates this tradeoff, we measured simultaneous responses from populations of ganglion cells presented with natural and artificial stimuli that varied greatly in correlation structure. We found that pairwise correlations in the retinal output remained similar across stimuli with widely different spatio-temporal correlations including white noise and natural movies. Meanwhile, purely spatial correlations tended to increase correlations in the retinal response. Responding to more correlated stimuli, ganglion cells had faster temporal kernels and tended to have stronger surrounds. These properties of individual cells, along with gain changes that opposed changes in effective contrast at the ganglion cell input, largely explained the similarity of pairwise correlations across stimuli where receptive field measurements were possible.Comment: author list corrected in metadat

Comparing skew Schur functions: a quasisymmetric perspective

Reiner, Shaw and van Willigenburg showed that if two skew Schur functions s_A and s_B are equal, then the skew shapes A and B must have the same "row overlap partitions." Here we show that these row overlap equalities are also implied by a much weaker condition than skew Schur equality: that s_A and s_B have the same support when expanded in the fundamental quasisymmetric basis F. Surprisingly, there is significant evidence supporting a conjecture that the converse is also true. In fact, we work in terms of inequalities, showing that if the F-support of s_A contains that of s_B, then the row overlap partitions of A are dominated by those of B, and again conjecture that the converse also holds. Our evidence in favor of these conjectures includes their consistency with a complete determination of all F-support containment relations for F-multiplicity-free skew Schur functions. We conclude with a consideration of how some other quasisymmetric bases fit into our framework.Comment: 26 pages, 7 figures. J. Combin., to appear. Version 2 includes a new subsection (5.3) on a possible skew version of the Saturation Theore

A scalable hardware and software control apparatus for experiments with hybrid quantum systems

Modern experiments with fundamental quantum systems - like ultracold atoms, trapped ions, single photons - are managed by a control system formed by a number of input/output electronic channels governed by a computer. In hybrid quantum systems, where two or more quantum systems are combined and made to interact, establishing an efficient control system is particularly challenging due to the higher complexity, especially when each single quantum system is characterized by a different timescale. Here we present a new control apparatus specifically designed to efficiently manage hybrid quantum systems. The apparatus is formed by a network of fast communicating Field Programmable Gate Arrays (FPGAs), the action of which is administrated by a software. Both hardware and software share the same tree-like structure, which ensures a full scalability of the control apparatus. In the hardware, a master board acts on a number of slave boards, each of which is equipped with an FPGA that locally drives analog and digital input/output channels and radiofrequency (RF) outputs up to 400 MHz. The software is designed to be a general platform for managing both commercial and home-made instruments in a user-friendly and intuitive Graphical User Interface (GUI). The architecture ensures that complex control protocols can be carried out, such as performing of concurrent commands loops by acting on different channels, the generation of multi-variable error functions and the implementation of self-optimization procedures. Although designed for managing experiments with hybrid quantum systems, in particular with atom-ion mixtures, this control apparatus can in principle be used in any experiment in atomic, molecular, and optical physics.Comment: 10 pages, 12 figure

Optimal portfolio choice under regime switching, skew and kurtosis preferences

This paper proposes a new tractable approach to solving multi-period asset allocation problems. We assume that investor preferences are defined over moments of the terminal wealth distribution such as its skew and kurtosis. Time-variations in investment opportunities are driven by a regime switching process that can capture bull and bear states. We develop analytical methods that only require solving a small set of difference equations and thus are very convenient to use. These methods are applied to a simple portfolio selection problem involving choosing between a stock index and a risk-free asset in the presence of bull and bear states in the return distribution. If the market is in a bear state, investors increase allocations to stocks the longer their time horizon. Conversely, in bull markets it is optimal for investors to decrease allocations to stocks the longer their investment horizon.Assets (Accounting)

Investigation to develop a multistage forest sampling inventory system using ERTS-1 imagery

The author has identified the following significant results. The annotation system produced a RMSE of about 200 m ground distance in the MSS data system with the control data used. All the analytical MSS interpretation models tried were highly significant. However, the gains in forest sampling efficiency that can be achieved by using the models vary from zero to over 50 percent depending on the area to which they are applied and the sampling method used. Among the sampling methods tried, regression sampling yielded substantial and the most consistent gains. The single most significant variable in the interpretation model was the difference between bands 5 and 7. The contrast variable, computed by the Hadamard transform was significant but did not contribute much to the interpretation model. Forest areas containing very large timber volumes because of large tree sizes were not separable from areas of similar crown cover but containing smaller trees using ERTS image interpretation only. All correlations between space derived timber volume predictions and estimates obtained from aerial and ground sampling were relatively low but significant and stable. There was a much stronger relationship between variables derived from MSS and U2 data than between U2 and ground data