Portfolio selection models: A review and new directions

Modern Portfolio Theory (MPT) is based upon the classical Markowitz model which uses variance as a risk measure. A generalization of this approach leads to mean-risk models, in which a return distribution is characterized by the expected value of return (desired to be large) and a risk value (desired to be kept small). Portfolio choice is made by solving an optimization problem, in which the portfolio risk is minimized and a desired level of expected return is specified as a constraint. The need to penalize different undesirable aspects of the return distribution led to the proposal of alternative risk measures, notably those penalizing only the downside part (adverse) and not the upside (potential). The downside risk considerations constitute the basis of the Post Modern Portfolio Theory (PMPT). Examples of such risk measures are lower partial moments, Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR). We revisit these risk measures and the resulting mean-risk models. We discuss alternative models for portfolio selection, their choice criteria and the evolution of MPT to PMPT which incorporates: utility maximization and stochastic dominance

The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds

This paper introduces a proposal for money market fund (MMF) reform that could mitigate systemic risks arising from these funds by protecting shareholders, such as retail investors, who do not redeem quickly from distressed funds. Our proposal would require that a small fraction of each MMF investor's recent balances, called the minimum balance at risk (MBR), be demarcated to absorb losses if the fund is liquidated. Most regular transactions in the fund would be unaffected, but redemptions of the MBR would be delayed for thirty days. A key feature of the proposal is that large redemptions would subordinate a portion of an investor's MBR, creating a disincentive to redeem if the fund is likely to have losses. In normal times, when the risk of MMF losses is remote, subordination would have little effect on incentives. We use empirical evidence, including new data on MMF losses from the U.S. Treasury and the Securities and Exchange Commission, to calibrate an MBR rule that would reduce the vulnerability of MMFs to runs and protect investors who do not redeem quickly in crises

An Asian Perspective on Global Financial Reforms

The purpose of this study is to better understand the likely impact on Asian economies and financial institutions of various recent global financial reforms, including Basel III capital adequacy and liquidity rules. Part one reviews the lessons of the global financial crisis (GFC) of 2007-09 and their relevance for Asian economies. Part two describes the major regulatory reforms that have been announced and possible concerns about their impacts on emerging economies. Part three reviews the literature aimed at quantifying the impacts of Basel III capital adequacy rules. Part four develops our methodology and analysis of the quantitative impact of Basel III capital adequacy rules on a panel of Southeast Asian financial institutions with emphasis on the effect on economic growth. Finally, the study concludes with a discussion on the policy implications of the results obtained from the previous section for Asian financial sectors and economies. Overall, we find that the Basel III capital adequacy rules are likely to have limited impacts on economic growth in Asia, but other financial regulations, including liquidity standards and rules for over-the-counter (OTC) derivatives, could have stunting effects on financial development in the region

European Code against Cancer 4th Edition: Alcohol drinking and cancer.

Alcohol consumption is the third leading risk factor for disease and mortality in Europe. As evaluated by the International Agency for Research on Cancer (IARC) Monographs, a causal relationship is established for consumption of alcoholic beverages and cancers of the oral cavity, pharynx, larynx, oesophagus, liver, colorectum and female breast, even at low and moderate alcohol intakes. The higher the amount of alcohol consumed, the higher the risk of developing cancer. In Europe, an estimated 10% (95% CI: 7%-13%) of all cancer cases in men and 3% (95% CI: 1%-5%) of all cancer cases in women are attributable to alcohol consumption. Several biological mechanisms explain the carcinogenicity of alcohol; among them, ethanol and its genotoxic metabolite, acetaldehyde, play a major role. Taking all this evidence into account, a recommendation of the 4th edition of European Code against Cancer is: "If you drink alcohol of any type, limit your intake. Not drinking alcohol is better for cancer prevention.

Components of the Profitability of Technical Currency Trading

This paper investigates the sources of the profitability of 1024 moving average and momentum models when trading in the German mark (euro)/U.S. dollar market based on daily data. The main results are as follows. First, each of these models would have been profitable over the entire sample period. Second, this profitability is exclusively due to the exploitation of persistent exchange rate trends. Third, these results do not change substantially when trading is examined within subperiods. Fourth, the 25 best performing models in each in-sample period examined were profitable also out of sample in most cases. Fifth, the profitability of technical trading the German mark (euro)/U. S. dollar exchange rate has been significantly lower since the late 1980s as compared to the first 15 years of the floating rate period

Private Infrastructure Finance and Investment in Europe

This study discusses the structure and development of private infrastructure finance in Europe in a global context. It examines the contribution of private capital to the financing of infrastructure investment needs. A 'big picture' is created by putting the various financing instruments and investment vehicles into a simple frame, i.e. percentages of GDP. There is scope for the development of alternative financing arrangements (such as public-private partnerships) and investment vehicles (such as project bonds and suitable investment funds). However, the traditional ways of corporate (and public) capital expenditure as well bank lending, need to keep working in Europe. Institutional investors can play a bigger role as a source of finance but expectations should be realistic. There are a number of barriers in place, regulatory and otherwise, that need to be worked on

Are the major global banks now safer? Structural continuities and change in banking and finance since the 2008 crisis

Are the largest banks now safer since the Global Financial Crisis? Focusing on a ‘before’ (2005) and ‘after’ (2015) balance sheet analysis of twenty-one of the largest American, British and European banks, we assess post-crisis banking stability. Much of the literature focuses on post-crisis regulation, but we argue instead the main driver of change since the crisis has been structural conditions in banking and financial markets, particularly high levels of competition, bleak profit and share price conditions, and the largely unsolved too big to fail problem. Older as well as new forms of systemic risk thus prevail and many of the global banks still face major vulnerabilities

Billions on the Sidewalk Improving Savings by Reducing Investment Mistakes

This paper contributes the on-going debate on income inequality in advanced economies with a proposal aimed at reducing costly investment mistakes that are prevalent among middle-class households. The paper starts by describing how households should invest, compares it with what we know about how households do invest, and highlights discrepancies between the two (investment mistakes). After evaluating the costs of investment mistakes, the paper suggests that they could be reduced by accommodating cognitive biases through a simple process of financial education and appropriate default options. The policy described in this paper is immediately actionable at basically no cost and can have a large effect on the welfare of middle-class households in advanced economies