Jan Annaert

Performance Evaluation of Portfolio Insurance Strategies Using Stochastic Dominance Criteria

The continuing creation of portfolio insurance applications as well as the mixed research evidence suggests that so far no consensus has been reached about the effectiveness of portfolio insurance. Therefore, this paper provides a performance evaluation of the stop-loss, synthetic put and constant proportion portfolio insurance techniques based on a block-bootstrap simulation. Apart from more traditional performance measures, we consider the Value-at-risk and Expected Shortfall of the strategies, which are more appropriate in an insurance context. An additional performance evaluation is given by means of the stochastic dominance framework where we account for sampling error. A sensitivity analysis is performed in order to examine the impact on performance of a change in a specific decision variable (ceteris paribus). The results indicate that a buy-and-hold strategy does not dominate the portfolio insurance strategies at any stochastic dominance order. Moreover, both for the stop-loss and synthetic put strategy a 100% floor value outperforms lower floor values. For the CPPI strategy we find that a higher CPPI multiple enhances the upward potential of the CPPI strategies, but harms the protection level in return. As regards the optimal rebalancing frequency, daily rebalancing should be preferred for the synthetic put and CPPI strategy, despite the higher transaction costs.

Determinants of mutual fund underperformance: A Bayesian stochastic frontier approach

Abstract The purpose of this paper is to identify ex ante fund statistics that can be related to future performance of European equity funds. In an efficient market setting, actively managed portfolios cannot outperform a passive benchmark strategy. However, purely by chance, some funds outperform their benchmark ex post, making the identification of performance determinants a difficult task. To alleviate this problem, we decompose the return deviation from its expected return into a noise component and an efficiency term, which is 100% if the fund exhibits no underperformance. The decomposition is based on the Bayesian frontier approach. We find evidence that fund efficiency is positively related to fund size and historical performance, the latter being solely due to the poorly performing funds. We fail to find a link between fund age and performance.

Do Universal Banks Create Value? Universal Bank Affiliation and Company Performance in Belgium, 1905-1909

We investigate the impact of universal banks on the performance and the risk of affiliated companies in an unregulated environment with booming financial markets. For a unique sample of 129 Belgian companies listed in the period 1905-1909, we find that universal bank affiliation had a positive impact on the market-to-book ratio and return-on-assets. The effect on performance was positively related to the degree of bank involvement. Universal banks significantly reduced the volatility of return-on-assets. Stock return performance, measured by the Sharpe ratio, was also significantly better for affiliated corporations.

Are blue chip stock market indices good proxies for all-shares market indices? The case of the Brussels Stock Exchange 1833-2005

In this article, we calculate a market-weighted return index for the 20 largest stocks listed on the Brussels Stock Exchange over the period 1833–2005, based on a new, unique and high-quality database. We find that this index captures the most important stylised facts of the value-weighted return of all shares listed on the Brussels Stock Exchange in this period. Our results support the empirical practice of concentrating on just the largest stocks. The indices we construct are based on one of the longest Belgian time series available. The indices take into account the exact dividends, the timing of the dividend cash flows and all capital operations. We are therefore able to decompose total returns into capital gain returns and dividend returns, which is not possible with most historical return series. We show that, to construct a credible return index, it is crucial to fully take into account dividends.

The Big Mac: More than a junk asset allocator?

Abstract Since 1986 The Economist annually computes exchange rate over- or undervaluation using the prices of McDonalds Big Mac hamburger in different currencies. In this paper we tested whether currency portfolios based on these so-called misalignments earned the German, the Japanese or the U.S. investor an excess return. In general, we find such excess returns when misalignments are computed with reference to a relative version of PPP.

Financial market volatility : informative in predicting recessions

It is commonly agreed that the term spread and stock returns are useful in predicting recessions. We extend these empirical findings by examining interest rate and stock market volatility as additional recession indicators. Both risk-return analysis and the theory of investment under uncertainty provide a rationale for this extension. The results for the United States, Germany and Japan show that interest rate and stock return volatility contribute significantly to the forecasting of future recessions. This holds in particular for short term predictions.

Estimating the Yield Curve Using the Nelson-Siegel Model: A Ridge Regression Approach

The Nelson-Siegel model is widely used in practice for fitting the term structure of interest rates. Due to the ease in linearizing the model, a grid search or an OLS approach using a fixed shape parameter are popular estimation procedures. The estimated parameters, however, have been reported (1) to behave erratically over time, and (2) to have relatively large variances. We show that the Nelson-Siegel model can become heavily collinear depending on the estimated/fixed shape parameter. A simple procedure based on ridge regression can remedy the reported problems significantly.

Gold as a hedge against inflation : the Vietnamese case

Abstract We investigate the inflation-hedging properties of gold in Vietnam, reaching formidable records in 1980s-1990s. Consistent with conventional belief, we find that gold provides a complete hedge against both the ex post and ex ante inflation. In addition, its return is positively related to unexpected inflation, although the statistical evidence does not strongly support this. However, in general, we cannot reject that gold does provide a complete hedge against inflation. Furthermore, our findings support the Fisher hypothesis that nominal gold returns move in a one-for-one correspondence with expected inflation. The study has implications for both investors and government.

Long-Horizon Mean Reversion for the Brussels Stock Exchange: Evidence for the 19th Century

In this paper, we introduce a completely new and unique historical dataset of Belgian stock returns during the nineteenth and the beginning of the twentieth century. This high-quality database comprises stock price and company related information on more than 1500 companies. Given the extensive use of CRSP return data and the data mining risks involved it provides an interesting out-of-sample dataset with which to test the robustness of ‘prevailing’ asset pricing anomalies. We re-examine mean reversals in long-horizon returns using the framework of Hodrick (1992) and Jegadeesh (1991). Our simulation experiments demonstrate that it has considerably better small sample properties than the traditional regression framework of Fama and French (1988a). In the short run, returns exhibit strong persistence, which is partially induced by infrequent trading. Contrary to Fama and French (1988a) and Poterba and Summers (1988), our results suggest that, in the long run, there is little to no evidence of stock prices containing autoregressive stationary components but instead resemble a random walk. Capital appreciation returns exhibit stronger time-varying behavior than total returns. Belgian stock returns demonstrate significant seasonality in January notwithstanding the absence of taxes. In addition, in contrast to other months, January months do show some evidence of mean reversion.

Don't Fall from the Saddle: The Importance of Higher Moments of Credit Loss Distributions

The original Panjer recursion of the CreditRisk+ model is said to be unstable and therefore to yield inaccurate results of the tail distribution of credit portfolios. A much-hailed solution for the flaws of the Panjer recursion is the saddlepoint approximation method. In this paper we show that the saddlepoint approximation is an accurate and robust tool only for credit portfolios with low skewness and kurtosis of the loss distribution. However, often credit portfolios are heterogeneous with large skewness and kurtosis. We show that for such portfolios the commonly applied saddlepoint approximations (the Lugannani-Rice and the Barndorff-Nielsen formulas) are not reliable. We explain it by the dependence of the high-order standardized cumulants and the relative error on the saddlepoint. The more the cumulants and the relative error fluctuate for variations in the value of the saddlepoint (from 0 to the upper bound) the less accurate the saddlepoint approximation is. Hence, the saddlepoint approximations are not a universal substitute to the Panjer recursion algorithm. We also provide users of CR+ with a set of diagnostics to identify beforehand when the saddlepoint approximations are prone to failure.