Asset allocation in wealth management using stochastic models

Modern financial asset pricing theory is a broad, and at times, complex field. The literature review in this study covers many of the asset pricing techniques including factor models, random walk models, correlation models, Bayesian methods, autoregressive models, moment-matching models, stochastic jumps and mean reversion models. An important topic in finance is portfolio opti-misation with respect to risk and reward such as the mean variance optimisation introduced by Markowitz (1952). This study covers optimisation techniques such as single period mean variance optimisation, optimisation with risk aversion, multi-period stochastic programs, two-fund separa- tion theory, downside optimisation techniques and multi-period optimisation such as the Bellman dynamic programming model. The question asked in this study is, in the context of investing for South African individuals in a multi-asset portfolio, whether an active investment strategy is signi cantly di erent from a passive investment strategy. The passive strategy is built using stochastic programming with moment matching methods for non-Gaussian asset class distributions. The strategy is optimised in a framework using a downside risk metric, the conditional variance at risk. The active strategy is built with forward forecasts for asset classes using the time-varying transitional-probability Markov regime switching model. The active portfolio is finalised by a dynamic optimisation using a two-stage stochastic programme with recourse, which is solved as a large linear program. A hypothesis test is used to establish whether the results of two strategies are statistically different. The performance of the strategies are also reviewed relative to multi-asset peer rankings. Lastly, we consider whether the findings reveal information on the degree of effi ciency in the market place for multi-asset investments for the South African investor.Operations ManagementM. Sc. (Operations Research

Managerial flexibility and competitive interaction in investment decisions : a discrete-time agency theoretic perspective

JEL Classification System: C70; G31; G32.This work intends to incorporate into a unified perspective three different fields of corporate finance: the managerial flexibility present in investment projects through the so-called real options models; the existence of agency costs as a result of financing strategies that rely in a mix between equity and debt; the existence of competition between firms, in non-purely competitive markets, through game theory. The aim of this work is to produce an integrated perspective of analysis that constitutes a value added to the literature, bringing new angles of approach to these issues. Indeed, to date, the link between these different aspects that affect managerial decisions in competitive markets is not yet established in a unified point of view. As such, we believe that the connection established in the present research may contribute to an improved understanding of that decision-making process. The work comprises two fundamental components. First, a theoretical review of concepts and latest developments in each of the different themes which are later combined. After such review, a discrete-time model that makes the connection between these theories is developed. Such model departs from the analysis of Mauer and Ott (2000) and Smit and Trigeorgis (2004). Afterwards, a numerical simulation is performed and the findings from such analysis are described. The results, from the simulation performed show that the existence of competition in non-purely competitive markets does produce a significant impact in managerial decisions.Este trabalho pretende incorporar numa perspectiva unificada três diferentes temáticas das finanças empresariais: a flexibilidade operacional presente em projectos de investimento através dos denominados modelos de opções reais; a existência de custos de agência em consequência de estratégias de financiamento que recorrem a capitais próprios e a capitais alheios; a concorrência entre empresas, em mercados não puramente concorrenciais, analisada através da teoria de jogos. Pretende-se com este trabalho trazer uma perspectiva integradora de análise que constitua uma mais valia para a literatura e que permite trazer novos prismas de abordagem a estas questões. Com efeito, até ao presente, a ligação entre estes diferentes aspectos, que afectam a tomada de decisões empresariais em mercados concorrenciais, ainda não se encontra estabelecida de uma forma unificada. Como tal, julgamos que a ligação aqui estabelecida pode contribuir para uma melhoria na compreensão dessa mesma tomada de decisões. O trabalho desenvolvido inicia-se com uma revisão teórica dos principais conceitos e desenvolvimentos mais recentes em opções reais, teoria da agência e teoria dos jogos. A seguir, desenvolve-se um modelo a tempo discreto que unifica essas mesmas teorias. Tal modelo desenvolve-se a partir da análise de Mauer e Ott (2000) e da de Smit e Trigeorgis (2004). Posteriormente, procede-se a uma simulação e apresenta-se as conclusões da análise realizada. Os resultados encontrados demonstram que, na simulação realizada a existência de concorrência em mercados não puramente competitivos produz impactos significativos na tomada de decisões empresariais

Markov switching modelling of interest rate pass-through

The first paper, "Interest rate pass-through and financial crises: do switching regimes matter? The case of Argentina", analyses the dynamic relationship between a money market (interbank) rate and different short-term lending rates by measuring their passthrough. Neither linear single-equation modelling nor linear multi-equation systems capture efficiently this relationship. Several financial crises alter the speed and degree of response to interbank rate shocks. Hence, a Markov switching VAR model shows the pass-through increases considerably for all market interest rates in a high-volatility scenario. The model identifies correctly the periods in which regime shifts occur, and associates them to financial crises. The second paper, "Modelling interest rate pass-through with endogenous switching regimes in Argentina", extends the scope of the Markov switching modelling by including time-varying transition probabilities. Interest rate spreads are used as leading indicators. The model allows devaluation expectations and country risks, (measured by rate spreads) to signal regime switching. Estimation results suggest that the passthrough tends to overshoot with financial instability, but to decrease if that condition is sufficiently large and long-lived. Likewise, results show a quite heterogeneous credit market, with a highly efficient transmission mechanism in the corporate segment, but considerably less in the consumer segment. The final paper, "Regime switching in interest rate pass-through and dynamic bank modelling with risks", builds a theoretical model of dynamic bank optimisation, which provides rationale to a regime-switching behaviour in the interest rate pass-through. It is shown that a regime-switching interbank rate induces a nonlinear behaviour in lending and deposit rates and (by further introducing interbank-alike regime-switching risk premiums) in the pass-through. Thus, the pass-through process is consistent with a nonlinear behaviour even if there are no asymmetric adjustment costs in the response to interbank rate shocks. An empirical application to France and Germany provide results that support these conclusions.EThOS - Electronic Theses Online ServiceUniversity of Warwick. Dept. of EconomicsBanco Central de Reserva del PerúGBUnited Kingdo

Essays in credit risk management

Credit risk management is becoming more and more important in recent years. Credit risk refers to the risk that an obligor fails to make payments on any type of debt at the time of maturity. Credit risk models are statistical tools to infer the future default probabilities and loss distribution of values of a portfolio of debts. This doctoral thesis focus on the application of credit risk management in different areas. To better understand the credit risk management, in the first chapter, we introduce the basic ideas in credit risk management and review the models developed in the last decades. To empirical test the performance of models reviewed in the first chapter, in the second chapter, we compare the reduce-form model with the structural model based on the China’s stock market. It turns out that both models contribute to explaining the default risk of listed firms, however, reduce-form model outperformances the structural model. The empirical results from the second chapter suggests that reduce-form model can better predict the firm’s default risk, but the correlated default risk between firms has not been answered yet. So therefore in the third chapter, we investigate the correlated default risk using copula theory which has been introduced in the first chapter. Based on the insurances firms and other financial firms in the US market, both short-term and long-term default dynamic correlations are found. Another interesting finding from the third chapter is that insurance firms which were considered to be stable actually have higher default risk. This motive us to further explore the determinants of default risk of insurance firms in the fourth chapter and new risk factors (macroeconomic and insurance-specific variables) are found

Ensaios sobre flexibilidade da cadeia de abastecimento: uma abordagem de opções reais

Doutoramento em Gestão IndustrialA presente tese investiga o processo de tomada de decisão na gestão de cadeias de abastecimento, utilizando um quadro de análise de opções reais. Especificamente, estudamos tópicos como o nível de inventário ideal para protecção contra a incerteza da procura, o momento para implementação de capacidade flexível em mercados onde existe complexidade no mix de produtos, o tempo para o reforço do factor trabalho visando requisitos de serviço ao mercado, e as decisões entre integração e outsourcing num ambiente de incerteza. Foram usadas metodologias de tempo discreto e contínuo para identificar o valor ideal e o calendário das opções a adoptar, quando a procura é estocástica. Além disso, foram considerados os efeitos dos requisitos dos mercados, como a complexidade na oferta de produtos e o nível de serviço. A procura é representada recorrendo a diferentes processos estocásticos, o impacto de saltos inesperados também é explorado, reforçando a generalização dos modelos a diferentes condições de negócio. A aplicabilidade dos modelos que apresentamos permite a diversificação e o enriquecimento da literatura sobre a abordagem de opções reais, no âmbito das cadeias de abastecimento. Níveis de inventário flexíveis e capacidades flexíveis são característicos das cadeias de abastecimento e podem ser usados como resposta à incerteza do mercado. Esta tese é constituída por ensaios que suportam a aplicação dos modelos, e consiste num capítulo introdutório (designado por ensaio I) e mais seis ensaios sobre factores que discutem o uso de medidas de flexibilidade nas cadeias de abastecimento, em ambientes de incerteza, e um último ensaio sobre a extensão do conceito de flexibilidade ao tratamento da avaliação de planos de negócio. O segundo ensaio que apresentamos é sobre o valor do inventário num único estádio, enquanto medida de flexibilidade, sujeita ao crescente condicionalismo dos custos com posse de activos. Introduzimos uma nova classificação de artigos para suportar o indicador designado por overstock. No terceiro e quarto ensaio ampliamos a exploração do conceito de overstock, promovendo a interacção e o balanceamento entre vários estádios de uma cadeia de abastecimento, como forma de melhorar o desempenho global. Para sustentar a aplicação prática das abordagens, adaptamos o ensaio número três à gestão do desempenho, para suportar o estabelecimento de metas coordenadas e alinhadas; e adaptamos o quarto ensaio à coordenação das cadeias de abastecimento, como auxiliar ao planeamento integrado e sequencial dos níveis de inventário. No ensaio cinco analisamos o factor de produção “tecnologia”, em relação directa com a oferta de produtos de uma empresa, explorando o conceito de investimento, como medida de flexibilidade nas componentes de volume da procura e gama de produtos. Dedicamos o ensaio número seis à análise do factor de produção “Mão-de-Obra”, explorando as condicionantes para aumento do número de turnos na perspectiva económica e determinando o ponto crítico para a tomada de decisão em ambientes de incerteza. No ensaio número sete exploramos o conceito de internalização de operações, demarcando a nossa análise das demais pela definição do momento crítico que suporta a tomada de decisão em ambientes dinâmicos. Complementamos a análise com a introdução de factores temporais de perturbação, nomeadamente, o estádio de preparação necessário e anterior a uma eventual alteração de estratégia. Finalmente, no último ensaio, estendemos a análise da flexibilidade em ambientes de incerteza ao conceito de planos de negócio. Em concreto, exploramos a influência do número de pontos de decisão na flexibilidade de um plano, como resposta à crescente incerteza dos mercados. A título de exemplo, usamos o mecanismo de gestão sequencial do orçamento para suportar o nosso modelo. A crescente incerteza da procura obrigou a um aumento da agilidade e da flexibilidade das cadeias de abastecimento, limitando o uso de muitas das técnicas tradicionais de suporte à gestão, pela incapacidade de incorporarem os efeitos da incerteza. A flexibilidade é claramente uma vantagem competitiva das empresas que deve, por isso, ser quantificada. Com os modelos apresentados e com base nos resultados analisados, pretendemos demonstrar a utilidade da consideração da incerteza nos instrumentos de gestão, usando exemplos numéricos para suportar a aplicação dos modelos, o que claramente promove a aproximação dos desenvolvimentos aqui apresentados às práticas de negócio.The present thesis researches the process of decision making in supply chain management using a real options analysis framework. Specifically, we address issues regarding the optimal inventory level to hedge against demand uncertainties; the timing for equipment capacity implementation under market product mix complexity; the timing for workforce capacity reinforcement aiming market service requirements; and the decisions between integration and outsourcing in an uncertainty environment. Discrete and continuous time methodologies were used to identify the optimal value and timing of the options to adopt, when the demand is stochastic. Additionally, the effect of market requirements, such as product mix complexity and service level, were also taken into consideration. The demand is modelled under different stochastic processes; the impact of unexpected shocks is also explored, which enhances the generalization of the models to different business conditions. The applicability of the models enables the diversification and enrichment of the literature on the real options approach, within supply chain concept. Flexible inventory levels and the flexible capacity are supply chain features that can be used to deal with demand uncertainty. The thesis is organized by essays that support the application of the models, and consists of an introductory chapter (essay I) and six trials on factors that enhance the use of supply chain flexibility measures in uncertainty environments and an extended essay on the concept of flexibility to the evaluation of business plans. The second essay we present refers to the inventory value in a single echelon, as a measure of flexibility, subject to cost constraints. We introduce a new items’ classification to support the indicator designated as overstock. In the third and fourth experiments we extend the concept of overstock, promoting the interaction and balance between supply chain echelons in order to improve overall performance. For a practical application of the approaches, we adapted the third essay to the performance management, to support the establishment of coordinated and aligned goals, and used the fourth essay to the coordination of supply chains, supporting the integrated and sequential inventory planning. In the fifth essay we analyse manufacturing technology features in connection with the company's product mix, exploring the concept of investment as a flexible measure to deal with uncertain demand volume and product range flexibility. We dedicate the sixth essay to the analysis of the input "workforce", exploring the economic conditions for increasing the number of work shifts and determining the critical point for decision making in uncertainty environments. In the essay number seven, we explore the concept of internalisation of operations, focusing our analysis in the trigger moment that supports decision making in dynamic environments. We complement the analysis by introducing temporal factors that could disturb the change, including the preparation stage prior to any strategic alternative. Finally, in the last essay, we extend the concept of flexibility in uncertainty environments to the business plans analysis. Specifically, we explore the influence of the number of decision points in the flexibility of a plan in response to increasing market uncertainty. As an example, we use the mechanism of sequential budget to support the model. The increasing uncertainty in demand has promoted supply chains agility and flexibility, limiting the use of many of the traditional management techniques, because of their inability to incorporate the effects of uncertainty. Flexibility is clearly a competitive advantage that companies should have and therefore must be quantified. With the models developed and results that are presented, this thesis aims to demonstrate the usefulness of considering the uncertainty impact in management tools, using numerical examples to support the application of the models and the interpretation of the results, which clearly seek to bring the developments to the actual business practices