S.

YEAR
month

2014

Financ Mark Portf Manag

2013

AI & Soc

NAME OF JOURNAL

2012

Financ Mark Portf Manag

2014

Financ Mark Portf Manag

2007

Fin Mkts Portfolio Mgmt

2009

Financ Mark Portf Manag

2012

Financ Mark Portf Manag

1999

The Journal of Business

10

2014

The Journal of Portfolio Management

11

2012

The Journal of Alternative Investments

12

2014

The Journal of Portfolio Management

13

2003

The Journal of Business

14

2007

Fin Mkts Portfolio Mgmt

Title
The systematic risk of corporate bonds: default risk,
term risk, and index choice

Recent studies on corporate bond pricing that examine the role of various risk factors
in multi-factor models (e.g., Lin et al. 2011) underline the ongoing importance of this
topic in empirical debate. To date, however, there has been comparatively little focus
on European bond markets.

we examine the
systematic risk of corporate bonds and the pricing of risk factors based on a unique
long-term sample of European bonds.
that explicitly utilizes different available and constructed market
indices in one-factor and multi-factor bond pricing models in a European context
in contrast to most previous work, we draw conclusions from carefully constructed
portfolios returns and individual bond returns and do not use readily available
bond indices
International comparison of bubbles and bubble indicators

Causes of the bubble and bubble indicators

Bank loans-to-GDP ratio of Japan and the United state
Ratio of real estate loans to total loans
Growth rate of real estate loans to growth rate of the economy
This paper reports that the causes of the Japanese and
US bubbles can be seen in their expansionary monetary
policies and aggressive credit expansions in the housing
and real estate markets.
While it takes time for the housing
and real estate markets to adjust to drops in demand,
housing and real estate prices rise very quickly when
demand increases.
Many banks expand their loans to the
housing and real estate sector when they see that it is
profitable based on short-term expectations, and real estate
in Japan is used as collateral for bank loans, which exacerbated
the Japanese bubble. When the land price was
expected to rise, banks were certain that they could keep
their collateral values even if people defaulted on their
bank loans.
Portfolio risk management in a data-rich environment

This paper studies risk assessment using a new approach that involves building optimal
portfolios by modeling portfolio weights as a function of latent factors and
firm-specific characteristics.
This approach overcomes the classical problems of a
mean-variance portfolio, which requires estimating the expected values, variances,
and covariances of all of the portfolios assets.
another benefit of this new approach is that it can exploit a large data set (data-rich environment) of e
improve portfolio selection. The link between economic conditions and equity markets
is extensively examined in the literature, which frequently highlights the importance of fundamental e
Active currency management of international bond

portfolios

The quantitative active management of international bond portfolios deals with the
implementation of allocation and selection techniques to generate outperformance.
The estimation of return and risk related to the currency exposure is of highest priority
for this approach.
Themain focus in this paper is the estimation and implementation of
a quantitative yield-curve-based approach formulti-currency bond portfolio allocation
and selection with the goal of generating alpha.
Using the arbitrage price theory (APT), they argue that currency portfolio returns can
be decomposed into and explained by the beta factors carry, trend, value, and volatility
and the interception term alpha.
Do venture capitalists imitate portfolio size?

A note on portfolio choice for sovereign wealth funds

On the robustness of risk-based asset allocations

Country and currency diversification of bond

investments: do they really make sense for Swiss
investors?

Between 2002 and 2005, bonds denominated in Swiss Francs provided amonthly
return in excess of the Swiss Franc risk-free rate of approximately 0.42%. Compounded
over 1 year, this leads to an excess return of approximately 5.15%.
This undoubtedly represents a good result, both in absolute terms and relative
to the characteristics and history of the Swiss bond market.
As a result, it should not come as a surprise that the debate concerning the
benefits of foreign currency bonds for Swiss investors has become particularly

heated
it is common to hear from Swiss institutional investors and
their consultants that unhedged foreign currency bonds should not be included
in the strategic asset allocation of a diversified portfolio.
the term hedging is related to the immunization of foreign currency risk against
the domestic currency.
Unhedged foreign currency bonds should be replaced
either by hedged foreign currency bonds or by bonds denominated in Swiss
Francs. Similar arguments have also been made for other bond markets, but
they recently became particularly relevant for the Swiss market because of its
outstanding risk-adjusted performance.
Dividend-Price Ratios and stock returns : international evidance

Qualitative Hedge Fund Characteristics and Fund Performance: Changes Over Time

Risk Allocation: a new investment paradigm?

Dynamic AssetAllocationfor
Stocks, Bonds,andCash

An application of the BlackLitterman model

with EGARCH-M-derived views for international
portfolio management

ABSTRACT
In this paper,we empirically examine the systematic risk of corporate bonds
in the Euro area. Based on a unique sample of 784 bonds from 1999 to 2010, we
show that the systematic risk of constructed bond portfolios and individual bonds
measured against three different market indicesdepends on credit quality, term risk,
and index choice. A significant increase in systematic risk for lower-rated bonds is
observed following the start of the financial crisis. In multi-factor models, bond portfolios
load significantly on default and term risk, which are included as additional
factors. Conducting Fama and MacBeth cross-sectional tests, we find that default and
term risk are priced with economically relevant premiums that range from 0.35 to
0.62 % per month. Our results are robust to the inclusion of characteristics such as
rating and time to maturity.

The purpose of this paper is to analyze the

financial turmoil of the US subprime loan crisis of midNoughties and to compare it with the Japanese asset bubble
of late 1980s. While examining the two crises, it compares
the monetary policies of both countries, focusing on the
excess liquidity and expansion of bank loans that were
seen. This paper develops several bubble indicators,
including the ratio of real estate loans to total loans, the
loan-to-GDP ratio, and housing affordability. In order to
develop these indicators, it is necessary to compare banking
behavior in both Japan and the United States, as banks
in both countries were making loans beyond the point of
profit maximization. Property prices and monetary policy
in both countries influenced banking behavior significantly.
The bubble indicators developed in this paper can be used

as early warning indicators for future bubbles.

We study risk assessment using an optimal portfolio in which the weights

are functions of latent factors and firm-specific characteristics (hereafter, diffusion
index portfolio). The factors are used to summarize the information contained in a
large set of economic data and thus reflect the state of the economy. First, we evaluate
the performance of the diffusion index portfolio and compare it to both that of a
portfolio in which the weights depend only on firm-specific characteristics and an
equally weighted portfolio.We then use value-at-risk, expected shortfall, and downside
probability to investigate whether the weights-modeling approach, which is based
on factor analysis, helps reduce market risk. Our empirical results clearly indicate
that using economic factors together with firm-specific characteristics helps protect
investors against market risk.

onment) of economic variables to

ndamental economic factor

This paper focuses on the estimation and implementation of a holistic quantitative

yield-curve-based approach to managing multi-currency bond portfolios. The

primary task of the presented model is to manage the portfolio risk and return by
exploiting inefficiencies in the emergent complexity of both currency and bond markets
to generate alpha. Instead of using proxy variables, the expected return and risk
parameters are estimated directly using their underlying simplicity and connectivity,
period by period at specific moments in time, thus generating time diversification with
aggressive risk taking and positioning. As a result, the strategies described in this paper
can be classified as both alpha hunters and generators.

Abstract Venture capitalists face the challenge of determining how many

entrepreneurial ventures they should invest in. Kanniainen and Keuschnigg
(J Corp Finance 9:521534, 2003) develop a theoretical model based on economic
factors that shows how a venture capital fund should set its portfolio size
in order to achieve optimal returns. Determining the required economic inputs
to this model is difficult in practice however, given the informational asymmetries,
uncertainties and ambiguities present in the decision-making environment
of venture capitalists. Hence, we contend that general partners of venture capital
funds also use their prior venture capital fund management experience,
which we refer to as social capital, to overcome the difficulties they face in
solving the above optimization problem. Our results support our hypotheses
that portfolio size is explained by the interplay of economic and social factors.

Abstract The current vast account surpluses of commodity-rich nations, combined

with record account deficits in developed markets (the United States, Britain) have
created a new type of investor. Sovereign wealth funds (SWF) are instrumental in
deciding how these surpluses will be invested. We need to better understand the investment
problem for an SWF in order to project future investment flows. Extending
Gintschel and Scherer (J. Asset Manag. 9(3):215238, 2008), we apply the portfolio
choice problem for a sovereign wealth fund in a Campbell and Viceira (Strategic
Asset Allocation, 2002) strategic asset allocation framework. Changing the analysis

from a one to a multi-period framework allows us to establish a three-fund separation.

We split the optimal portfolio for an SWF into speculative demand as well as
hedge demand against oil price shocks and shocks to the short-term risk-free rate. In
addition, all terms now depend on the investors time horizon. We show that oil-rich
countries should hold bonds and that the optimal investment policy for an SWF as a
long-term investor is determined by long-run covariance matrices that differ from the
correlation inputs that one-period (myopic) investors use.

Since the subprime crisis, portfolios based on risk diversification are of

great interest to both academic researchers and market practitioners. They have also
been employed by several asset management firms and their performance appears
promising. Since they do not rely on estimates of expected returns, they are assumed
to be robust. The same argument holds for minimum variance and equally weighted
portfolios. In this paper, we consider aMonte Carlo simulation, as well as an empirical
global portfolio dataset, to study the effect of estimation errors on the outcomes of
two recently proposed asset allocations, the equally weighted risk contribution (ERC)
and the principal component analysis (PCA) portfolio. The ERC portfolio is more
robust to changes in the input parameters and has a smaller estimation error than the
Markowitz approaches, whereas the PCA portfolio is even more unstable than the
classical approaches. In the worst-case scenario, neither approach delivers what it
promises. However, in every case the resulting returnrisk relationship is dominated
by the Markowitz approaches.
The inclusion of hedged or unhedged foreign currency bonds within
a strategic asset allocation is a crucial decision which should be analyzed carefully.
The goal of this paper is to provide a contribution to this analysis by
focusing particularly on the time horizon of the investment. Results are analyzed
from the perspective of a Swiss investor.We find that over the last 21 years,
investing in bonds denominated in Swiss Francs has been clearly less efficient
in terms of risk-adjusted returns than investing in a hedged global bond portfolio.
For short-term investors, we find robust evidence against the hypothesis
of investing in unhedged foreign currency bonds. The picture changes dramatically,
however, when we consider an investment horizon of 6 years and the
normal case of balanced portfolios including also equities and domestic bonds.
In this case, the optimal strategy for the period we analyzed would have been
to hedge only the exposure to US dollar bonds.

Theoretical framework
In order to refer to concepts that are also well-known among practitioners, we
will use the mean-variance portfolio analysis as the theoretical framework of this
paper. One of the earliest versions of this analysis was developed by Markowitz
(1952). The use of this framework is generally justified by an assumption of
normality of the portfolio returns. In most cases, the assumption of normality is

not violated for the portfolios and time horizons we consider in this paper. We
will report on the cases for which certain evidence of non-normality emerges
from the data.
Consistent with the selected framework of mean-variance portfolio analysis,
the parameter we will use to rank the efficiency of the different portfolios is the
Sharpe Ratio, as described by Sharpe (1970). Again, this has the advantage of
being a very well-known parameter among practitioners.

the predictability of stock returns,

particularly based on f inancial
ratios, remains a question of widespread
interest among both academics
and practitioners. In his presidential
address to the American Finance Association,
John Cochrane [2011] cite regressions of
future returns and future dividend growth on
dividend yields as evidence for stock-return
predictability. He reports, like many before
him, that with respect to U.S. data, dividend
yield is a significant predictor of future
returns, but not future dividend growth.
The return regressions that Cochrane
cites are not just a theoretical curiosity, but
have huge economic significance as well. The
slope coefficient in his (and most other) regressions
implies that, when dividend yields rise by
one percentage point, prices jump more than
three percentage points.
These findings are inconsistent with
the early interpretation of the eff icient
market hypothesis, in which it was assumed
that expected returns (discount rates) were
largely constant. If that were true, then the
dividend yield should forecast future dividend
growth, not future returns.
Investors
would accept low yields only if they anticipated
rapid future dividend growth, whereas

high yields would be associated with lower

expected dividend growth
edge funds have become a very
important asset class for institutional
investors. Hedge funds now
have in excess of $2 trillion in
assets under management and provide an important
source for diversification and theoretically
uncorrelated returns. Given the rapid growth in
the size of the industry,1 a natural question for
investors is how one finds a hedge fund capable
of generating superior risk-adjusted returns.
a large amount of research has been dedicated to
this question, with a number of studies identifying
key hedge fund characteristics that supposedly
lead to superior performance (the locking
up of investors in a fund, the protection of investors
from paying performance fees before the
fund re-attains prior peak performance, and the
enhanced fees necessary for motivating the portfolio
managers)
The argument is that these features
(investor liquidity, high-water marks, fees)
of hedge funds are what distinguish them (and
their superior performance) from traditional
long-only management.
What the concept of risk allocation
exactly means, however, deserves some clarification. Various
interpretations exist for what is sometimes presented
as a new investment paradigm and other times presented
as a simple reinterpretation of standard portfolio construction
techniques.
Overall, risk allocation can be thought of both as a
new investment paradigm that advocates a focus on allocating
to uncorrelated, rewarded risk factors, as opposed
to correlated asset classes, and as a portfolio construction
technique that stipulates how we should optimally allocate
to these risk factor
This recognition provides us with a first interpretation

for what the risk allocation paradigm might mean. If

portfolio construction ultimately aims to harvest the risk
premia expected from holding an exposure to rewarded
factors, it seems natural to express the allocation decision in
terms of such risk factors. In this context, the term factor
allocation is a new paradigm that advocates usefully casting
investment decisions in terms of risk-factor allocation decisions,
as opposed to asset class allocation decisions, which
are based on somewhat arbitrary classifications.
The second interpretation of the risk allocation paradigms
meaning involves precisely defining it as a portfolio
construction technique that can be used to estimate an
efficient allocation to underlying components, such as asset
classes or underlying risk factors. The starting point for this
novel approach to portfolio construction is the recognition
that a heavily concentrated set of risk exposures can
be hidden behind a seemingly well-diversified allocation.
In this context, the risk allocation approach to portfolio
construction, which is also known as risk budgeting, consists
of advocating a focus on risk allocation, as opposed
to dollar allocation. The risk allocation methodologys
goal is to ensure that each constituents contribution to
the portfolios overall risk is equal to a target risk budget

weconcentrateonthesimplestcaseofstochasticinterest
rates, aone-factorVasicek-typemodel,andwederiveclosed-formsolutions
in adynamicoptimizationmodelforinvestorsdisplayingHARA.Theinvestment setincludesfourassets:cash,stock,onebondfund(representedby
a zero-couponbondwithconstantmaturity),andazero-couponbondwith
maturity matchingtheinvestorshorizon T (the risk-freeasset).Theseassumptions implydynamicallycompletemarkets(althoughoneassetisredundant).
Another differencebetweenourmodelandmostofthepreviousrelated
work isthatHARAutilityisassumed(insteadofthemorerestrictiveCRRA)
with thepurposeofstudyingtheeffectsofwealthwithvaryingrelativerisk
aversion: forinstance,asweshow,thewaythatrelativeriskaversionvaries
with wealthisthekeyexplanationoftheinvestorschoicebetweenacontrarian
and amomentumstrategy.
This paper provides an application of the BlackLitterman methodology
to portfolio management in a global setting. The novel feature of this
paper relative to the extant literature on BlackLitterman methodology is that

we use GARCH-derived views as an input into the BlackLitterman model.

The returns on our portfolio surpass those of portfolios that rely on market equilibrium
weights or Markowitz-optimal allocations. We thereby illustrate how
the BlackLitterman model can be put to work in designing global investment
strategies.
This paper illustrates how the BlackLitterman model can be put to use in
resolving questions regarding appropriate allocations in global portfolio management.
We present time series of results, whereas most previous work gives
one-period allocation examples.1 The novel feature of the paper relative to
the extant literature on BlackLitterman methodology is the use of GARCHderived
views as proxies for investor views in the BlackLitterman model.
This approach may be superior to using subjective views of analysts, as general
autoregressive conditional heteroskedasticity (GARCH) models capture
many regularities of stock returns in an elegant and systematic way. It is useful
for expository pu

HYPOTHESES
Hypothesis 1 Market betas should increase with declining credit quality
Hypothesis 2 Market betas should increase with longer time to maturity
Hypothesis 3 Returns of the equity market index should especially explain returns of
lower-rated bonds, while the return of the bond index should have strong explanatory
power for the returns of all bonds.
Hypothesis 4 Default betas should increasewith declining credit quality and term betas
should increase with increasing maturity irrespective of the chosen market index.
Combining Hypotheses 1 through 4, we formulate Hypothesis 5:
Hypothesis 5 Default and term risk is priced in European corporate bond markets and
corresponding factor loadings help explain the cross-section of expected corporate
bond returns.

Hypothesis 1(H1): The portfolio size of the focal fund is positively related to
the portfolio size of its tied-to fund(s).
Hypothesis 2(H2): The relationship between the portfolio size of the focal fund
and the prior portfolio size of its tied-to fund(s) is stronger for funds that invest
in companies with higher asymmetric information between the venture capitalist
and the firm.
Hypothesis 3(H3): The relationship between the portfolio size of the focal fund
and the portfolio size of its tied-to fund(s) is stronger for funds with managing
general partner interlocks.
Hypothesis 4(H4): The relationship between the portfolio size of the focal fund
and the portfolio size of its tied-to fund(s) is stronger for funds located in
California.
Hypothesis 5(H5): The relationship between the portfolio size of the focal fund
and the portfolio size of its tied-to fund(s) is stronger for private independent
funds.

CONCLUSION

Methadology

This paper examines both the monetary policy of Japan

during the bubble period of the late 1980s and the monetary
policy of the United States during the subprime loan crisis
of mid-Noughties. It shows that the bubble indicators are
variables such as (1) the ratio of real estate loans to total
loans, (2) loan-to-GDP ratio, (3) growth rate of loans to
real estate in comparison with the growth rate of GDA, and
(4) housing price in comparison with income. The causes
of the bubble are explained as sluggish adjustments in the
property markets of both countries.
This paper empirically compares the banking behaviors
of both Japan and the United States. It has been shown that
monetary policy affected bank loan supplies in both
countries and that property prices influenced banking
behavior in both countries. However, the rival banks

Variables

behaviors affected the bank loan supply differently in

Japan and the United States. While Japanese banks
expanded their loans beyond the level of profit maximization,
US banks did not exhibit such behavior. The bubble
indicators shown in this paper could potentially have been
used as early warning indicators of these bubbles.

We studied risk assessment using a diffusion index portfolio, that is, a portfolio in
which the weights are a function of latent factors and firm-specific characteristics. The
factors are used to summarize the information contained in a large set of economic
data and thus reflect the state of the economy. First, we evaluated the performance of
the diffusion index portfolio and compared it to that of both a portfolio in which the
weights depend only on firm-specific characteristics and an equally weighted portfolio.
We then used value-at-risk, expected shortfall, and downside probability to investigate
whether the weights-modeling approach based on factor analysis helps reduce market
risk. Our empirical results clearly indicate that using economic factors together with
firm-specific characteristics helps protect investors against market risk.

A holistic quantitative approach to multi-currency bond management based on yield

curves using emerging and developed currencies successfully generates alpha in a

portfolio.Although themodel operates with volatility, the performance analysis shows
that currency volatility is not a significant factor. Hence the volatility holds economic
potential for improvements based on additional options and volatility strategies. In
my view, the alpha-generation process can be further developed and expanded by
employing such option strategies. In this context, the emergence in the components
and their connectivity in the fixed-income and currency markets should be further
analyzed. Thus not merely a diversification, but the exploitation of inefficiencies in
the emerging complexity holds promise as a further topic of research into portfolio
construction.

Existing empirical research does not consider imitation of portfolio size and this
behavior is not predicted by themodel of optimal portfolio size and profit maximization
developed by Kanniainen and Keuschnigg (2003).When approaching
venture capital firms for financing, entrepreneurs may wish to consider how
many firms the partner has managed in previous interlocking funds when assessing
the chances of obtaining financing. Similarly, limited partners could use this
model to predict the number of entrepreneurial firms that general partners are
able to manage based on past experience and other contributing variables.

Our papers unique contribution to the literature is an extension of the portfolio choice
problem for oil-rich sovereign investors from a one-period to a multi-period model.
This results in separate terms for speculative demand as well as for hedging demand
in an environment of intertemporal variation in short rates and shocks to oil wealth.
We arrive at a three-fund separation; in addition, all terms now depend on the investors
time horizon. This contrasts with earlier work that ignored the impact of
mean reversion on portfolio choice for an SWF. We also provide an empirical illustration
of our framework that includes equities, bonds, and listed real estate. Our
analysis leads us to conclude that an SWF should hold a considerable amount of assets

in long U.S. government bonds in order to hedge against the negative effects
of oil price shocks as well as against deteriorating short rates. Empirically, our results
are supported by the fact that part of the growing current account surplus of
commodity exporters has been invested in U.S. Treasury bonds. However, with SWF
funds recording losses of about 40% in 2008, while government bonds yielded about
20% in the same period, the typical SWF did not allocate nearly enough to bonds

The results reported in this paper provide evidence in favor of hedged foreign
currency bonds against the alternative hypothesis of investing only in
bonds denominated in Swiss Francs. If we consider the last 21 years as a whole,
investing in bonds denominated in Swiss Francs has been clearly less efficient
in terms of risk-adjusted returns than investing in a hedged global bond portfolio.
This conclusion holds independent of the time horizon of the investment.
This should not be surprising considering that global bond portfolios display
a much higher level of diversification than a portfolio investing only in bonds
denominated in Swiss Francs.

As stated, the question implies that there either is or is

not an unchanging relationship between the variables.
The data suggest otherwise. The relationships between
the variables depend on time and place. Rather than a
fundamental relationship that exists between dividendprice
ratios and future returns, there is substantial crosscountry
variation. The results are broadly consistent with
the Cornell [2013] hypothesis that the apparent predictability
is an artifact of the ex post, smooth, real dividend
growth in countries such as the United States and the
United Kingdom. To the extent that this hypothesis is
correct, the predictability of returns based on financial
ratios will vary across countries and over time, as the
volatility of dividend growth changes.
The results presented here serve as a warning.
Although it has been widely reported, on the basis of U.S.
data, that dividend-price ratios are predictive of future
returns, the international evidence is much more mixed.
In some countries, dividend-price ratios predict future
returns, in other countries they predict future dividend
growth, and in still other countries they predict a combination
of the two. For this reason, investors should be
wary of concluding that the return predictability observed
for one country will hold for another country, or even for
the same country at a different point in time.

A large amount of literature has tried to predict

hedge fund performance on the basis of readily observable
hedge fund characteristics. We examine three such
characteristicsrestrictions on investor liquidity, the
existence of a high-water mark provision, and hedge
fund feesto see whether characteristics can in fact predict
hedge fund performance. Our results are generally
negative; we find only limited predictability at best
Characteristics that were found to predict performance
in earlier time periods, such as investor liquidity and
high-water mark provisions, no longer do so. The other
characteristic, high hedge fund fees, is associated with
better fund performance, but only because better managers
are able to charge higher fees. A mediocre manager
choosing to charge higher fees will not as a result of
the higher fees generate superior performance. Hence,
a causal relationship between fees and performance has
not been established herein. Moreover, fee levels do not
exhibit sorting properties that could be used to aid in
the identification of superior managers after controlling
for past performance.

This paper provides an application of the BlackLitterman methodology to

portfolio management in a global setting. The main value added of this paper
stems from using EGARCH-M inputs instead of relying on financial analyst

views, and the resulting validity of time-series results. As our results indicate,
the returns on our portfolio surpass those of portfolios that rely on market
equilibrium weights.We thereby illustrate how the BlackLitterman model can
be put to work in designing global investment strategies
BlackLitterman allows investors to take risk where they have views, with
stronger views justifyingmore risk-taking (Bevan andWinkelmann 1998). Thus,
the output of the BlackLitterman model is a mixture of equilibrium (or neutral)
returns and investor views. The results presented in this paper attest to the
great potential ofBlackLitterman methodology in generating global portfolios
and contribute to a risk-based decision method for adjusting the confidence in
the expected return inputs

Future research

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