Style, Fees and Performance of Italian Equity Funds

Using a clustering procedure,we classify Italian funds ex-post on the basis of the composition of their portfolios and find that the optimal number of clusters is equal to 4. The four groups which result from the statistical classification closely match the 4-level aggregation of the 20 ex-ante categories used by the Italian mutual funds association. We then estimate the risk-adjusted performance of Italian equity funds, using both net and gross returns and employing both one-factor CAPM benchmarks and multi-factor benchmarks. In addition to the standard Jensen's a, we measure risk-adjusted performance using the Positive Period Weighting measure (PPW), which is not influenced by managers' market-timing strategy.Using net returns (calculated after management fees and taxes but before load fees) the Italian equity funds' performance is not significantly different from zero. However, when the funds'performance is evaluated on the basis of gross returns (i.e.returns computed adding back management fees paid each year by the funds), the performance of the Italian equity funds is always positive. In particular, when both a 2-index benchmark that takes account of the funds' investments in government bonds and a 5-factor APT benchmark are considered, performance is positive and significant using both Jensen's a and the PPW. This result supports Grossman and Stiglitz's (1980) view of market efficiency, suggesting that informed investors (investment funds) are compensated for their information gathering.mutual funds; performance measures; investment style; management fees; market timing

A suggestion for simplifying the theory of asset prices

Using an ordinal approach to utility, in the spirit of Hicks (1962, 1967a), it is possible to greatly simplify the theory of asset prices. The basic assumption is to summarize any probability distribution into its moments so that preferences over distributions can be mapped into preferences over vectors of moments. This implies that assets, like Lancaster’s (1966) consumption goods, are bundles of characteristics and can be directly priced, at the margin, in terms of the market portfolio. Expected utility is not required and both St.Petersburg and Allais paradoxes may be easily solved

Stochastic maximum principle with control-dependent terminal time and applications

In this thesis we study stochastic control problems with control-dependent stopping terminal time. We assess what are the methods and theorems from standard control optimization settings that can be applied to this framework and we introduce new statements where necessary. In the first part of the thesis we study a general optimal liquidation problem with a control-dependent stopping time which is the first time the stock holding becomes zero or a fixed terminal time, whichever comes first. We prove a stochastic maximum principle (SMP) which is markedly different in its Hamiltonian condition from that of the standard SMP with fixed terminal time. The new version of the SMP involves an innovative definition of the FBSDE associated to the problem and a new type of Hamiltonian. We present several examples in which the optimal solution satisfies the SMP in this thesis but fails the standard SMP in the literature. The generalised version of the SMP Theorem can also be applied to any problem in physics and engineering in which the terminal time of the optimization depends on the control, such as optimal planning problems. In the second part of thesis, we introduce an optimal liquidation problem with control-dependent stopping time as before. We analyze the case when an agent is trading on a market with two financial assets correlated with each other. The agent’s task is to liquidate via market orders an initial position of shares of one of the two financial assets, without having the possi- bility of trading the other stock. The main results of this part consist in proving a verification theorem and a comparison principle for the viscosity solution to the HJB equation and finding an approximation of the classical solution of the Hamilton-Jacobi-Bellman (HJB) equation associated to this problem.Open Acces

The economic effects of the new rules for the taxation of income from financial investment

The paper examines the economic effects of the tax rules that entered into force on 1 July 1998. While the difference with respect to the previous regime is negligible for bond portfolios, the taxation of capital gains has an appreciable impact on equity portfolios, reducing positive returns but also increasing negative returns (tax credit). The risk-sharing effect created by the new legislation reduces expected returns and volatility and, under certain conditions, can lead to greater demand for risky financial assets and higher equilibrium pre-tax returns. The uniformity of the tax rates and the equalizer mechanism tend to eliminate distortions and lock-in effects and to ensure the neutrality of taxation on the financial market. However, the tax advantage awarded to managed portfolios finds a limit in the difficulties of tax harmonization and coexistence between different, competing national systems.

A Simple Approach to CAPM, Option Pricing and Asset Valuation

In this paper we propose a simple, intuitive approach to asset valuation in terms of marginal contributions to the characteristics (moments) of the market portfolio. Considering only the first two moments, mean and variance, the valuation equation is shown to correspond to Sharpe’s CAPM. A risk-neutral pricing formula is easily derived, showing the equivalence between CAPM and the Black and Scholes’ model. Extensions to higher moments like skewness and kurtosis are straightforward, providing a generalized valuation equation. Finally, the generalized equation is derived in a different, more rigorous way, as a result of a classical intertemporal general equilibrium model

A Simple Approach to CAPM and Option Pricing

In this paper we propose a simple approach to asset valuation in terms of two characteristics, expected value and expected variability, and their distinct marginal contributions to the value of the market portfolio. The result is shown to correspond to Sharpe’s CAPM. We then show that pricing in terms of characteristics (or CAPM) applies to any asset and in particular to option valuation. A pricing formula corresponding to Black and Scholes’ no-arbitrage option pricing is obtained under the assumption of normal asset price distributions

A suggestion for simplifying the theory of asset prices

Using an ordinal approach to utility, in the spirit of Hicks (1962, 1967a), it is possible to greatly simplify the theory of asset prices. The basic assumption is to summarize any probability distribution into its moments so that preferences over distributions can be mapped into preferences over vectors of moments. This implies that assets, like Lancaster’s (1966) consumption goods, are bundles of characteristics and can be directly priced, at the margin, in terms of the market portfolio. Expected utility is not required and both St.Petersburg and Allais paradoxes may be easily solved

Analysis of european stock returns: evidence of a new risk factor

Due to increasing importance of industry diversification we analyse the sector risk structure of European stock markets. The presence of a new factor correlated to the new economy statistically explains returns variability in recent years.

Robust Portfolio Management

EnWe define and compare robust and non-robust versions of Vol-VaR- and CVaR-portfolio selection models showing that robust CVaR is coherent, easy implementable and the most efficient