Gary van Vuuren

Investigating the cyclical behaviour of the dry bulk shipping market

Cyclical behaviour in the shipping market was investigated, for the first time, using Fourier analysis to extract cycle frequency information from data which have been Hodrick–Prescott filtered; in this case, dry freight earnings data. An industry rule of thumb asserts that shipping cycles last 7 years, but using a sample of daily dry charter earnings over a 21-year period, a prominent 4-year shipping cycle in the dry bulk sector is found, with a longer 7-year cycle superimposed. A better understanding of the shipping cycle will facilitate investment, since timing has been identified as a principal decision-driver.

Conduct Risk in South African Banks: Aligning Regulatory Compliance with Business Sustainability

Regulators have imposed heavy penalties on banks for conduct failures since the global financial crisis occurred in 2007/2008. Banks play an important role in the economy, and it is therefore in the interests of both the public and government that banks have an effective conduct-risk approach in place; one that complies with regulation and ensures business sustainability. Current conduct-risk approaches are inadequate, and literature is sparse—especially regarding developing economies. The goal of this research was to explore ways in which banks can manage and mitigate conduct risk, while ensuring sustainability. The qualitative design of this study used South Africa as an example of a developing market; and it employed primary and secondary data. The analysis shows that banks have been focused on developing a suitable high-level strategy but have neglected the lower level (where employees and customers meet). Consequently, they have exposed themselves to conduct risk. Based on these findings, this article suggests that banks’ strategies should be tackled in a top-down fashion, while they simultaneously pursue customer outcomes from the bottom-up. This study is crucial, as banks must prepare for new legislation, avoid fines, and strategically position themselves to satisfy clients and remain sustainable. Since the last self-assessment by the (then called) Financial Services Board in 2013, no formal assessment of conduct risk in the South African banking industry has taken place.

Performance of two zero-cost derivative strategies under different market conditions

Abstract Zero-cost collars are option-based strategies which—by matching prices received and paid for the component derivatives—provide costless protection for stock or index investments. The investors’ risk appetite determines a return floor by selecting a relevant put strike and the associated call strike (reverse-engineered from the [known] call value) establishes the index return’s cap. Increasing the floor increases the cap and vice versa. A butterfly strategy involves the purchase of two call options and the sale of two put options. By choosing appropriate strikes, this assembly may also be structured such that it provides a costless investment strategy. Rolling strategies involve the purchase and later sale of the derivative components at a chosen frequency (usually monthly): but the literature has, to date, not explored the potential outcomes for such procedures. Using recent historical data, the effect of different strategy maturities and strike prices on potential index returns (from several jurisdictions) are investigated. The more profitable strategy is strongly influenced by the prevailing market conditions.

The maximum diversification investment strategy: A portfolio performance comparison

Abstract The efficacy of four different portfolio allocation strategies is evaluated according to their absolute returns during different economic conditions over a period of 10 years. A comparison is drawn between the Most Diversified portfolio (MD) and three alternatives; a Minimum Variance portfolio, an Equally-Weighted portfolio and a Tangent (or Maximum Sharpe ratio) portfolio. The aim is to assess portfolio performance using cumulative returns, the Sharpe ratio and the daily volatilities of each portfolio. The four asset allocation methods are governed by multiple constraints. Although previous work has shown that MD portfolios exhibit greater diversification and a higher Sharpe ratio than other investment strategies, this was not found using developed market index data.

Attribution of hedge fund returns using a Kalman filter

ABSTRACT Hedge funds offer attractive investment possibilities because they engage in investment styles and opportunity sets which – because they are different from traditional asset class funds – generate different risk exposures. Conventional wisdom holds that hedge funds add value and provide unique investment opportunities because of their ability to invest in disparate risk exposures, and via the manager’s skill in selecting stocks and timing the market. In this article, a Kalman filter is used to decompose the time series of hedge fund returns into market timing and stock selection factors to establish whether fund managers really do generate statistically significant abnormal profits. Compelling evidence supports an alternative interpretation for the market timing return constituent. This work represents the first time the Kalman filter has been used to extract a time series of the capital asset pricing model’s dynamic variables for determining return component magnitudes.

Optimizing tracking error-constrained portfolios

ABSTRACT Active portfolios subject to tracking error (TE) constraints are the typical setup for active managers tasked with outperforming a benchmark. The risk and return relationship of such constrained portfolios is described by an ellipse in traditional mean-variance space and the ellipse’s flat shape suggests an additional constraint which improves the performance of the active portfolio. Although subsequent work isolated and explored different portfolios subject to these constraints, absolute portfolio risk has been consistently ignored. A different restriction – maximization of the traditional Sharpe ratio on the constant TE frontier in absolute risk/return space – is added here to the existing constraint set, and a method to generate this portfolio is explained. The resultant portfolio has a lower volatility and higher return than the benchmark, it satisfies the TE constraint and the ratio of excess absolute return to risk is maximized (i.e. maximum Sharpe ratio in absolute space).

A comparison of risk aggregation estimates using copulas and Fleishman distributions

Determining banks’ expected losses (EL) is straightforward because they are calculated using a linear combination of credit risk-related measures. Non-linear metrics, like economic capital (EC), pose considerable implementation challenges including computation complexity and a lack of adequate risk aggregation and attribution techniques when multiple portfolios and/or product segmentations are involved. Copulas have been used to overcome these problems, but the Fleishman procedure, which uses a polynomial transformation to generate non-normal data, may provide a more tractable alternative. In this article, EC simulation estimates using the extended (multivariate) Fleishman method and the Gumbel copula are compared. The Fleishman approach is found to be easier to implement than the Gumbel approach and provides comparable results when the correlation and concordance between losses are low. The Fleishman method preserves the first four moments and two measures of dependence (Pearson’s

A proposed quantitative credit-rating methodology for South African provincial departments

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