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Publisher: Springer-Verlag (Total: 2350 journals)

 Annals of Operations Research   [SJR: 1.186]   [H-I: 78]   [10 followers]  Follow         Hybrid journal (It can contain Open Access articles)    ISSN (Print) 1572-9338 - ISSN (Online) 0254-5330    Published by Springer-Verlag  [2350 journals]
• Preface: analytical models for financial modeling and risk management
• Authors: Constantin Zopounidis; Michalis Doumpos; Kyriaki Kosmidou
Pages: 1 - 4
PubDate: 2018-07-01
DOI: 10.1007/s10479-018-2892-1
Issue No: Vol. 266, No. 1-2 (2018)

• Portfolio diversification in the sovereign credit swap markets
• Authors: Andrea Consiglio; Somayyeh Lotfi; Stavros A. Zenios
Pages: 5 - 33
Abstract: We develop models for portfolio diversification in the sovereign credit default swaps (CDS) markets and show that, despite literature findings that sovereign CDS spreads are affected by global factors, there is sufficient idiosyncratic risk to be diversified. However, we identify regime switching in the times series of CDS spreads and spread returns, and the optimal diversified strategies can be regime dependent. The developed models trade off the CVaR risk measure against expected return, consistently with the statistical properties of spreads. We consider three investment strategies suited for different CDS market participants: for investors with long positions, speculators that hold uncovered long and short positions, and hedgers with covered long and short exposures. We use the models to illustrate that diversification pays in the CDS market. The models are also tested for active portfolio management in Eurozone core and periphery, and Central, Eastern and South-Eastern Europe countries, and the optimized portfolio results outperform the broad S&P/ISDA Eurozone Developed Nation Sovereign CDS index. The paper concludes by identifying open questions in developing integrated enterprise-wide risk management models using CDS.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2565-5
Issue No: Vol. 266, No. 1-2 (2018)

• Corporate hedging: an answer to the “how” question
• Authors: Jörgen Blomvall; Jonas Ekblom
Pages: 35 - 69
Abstract: We develop a stochastic programming framework for hedging currency and interest rate risk, with market traded currency forward contracts and interest rate swaps, in an environment with uncertain cash flows. The framework captures the skewness and kurtosis in exchange rates, transaction costs, the systematic risks in interest rates, and most importantly, the term premia which determine the expected cost of different hedging instruments. Given three commonly used objective functions: variance, expected shortfall, and mean log profits, we study properties of the optimal hedge. We find that the choice of objective function can have a substantial effect on the resulting hedge in terms of the portfolio composition, the resulting risk and the hedging cost. Further, we find that unless the objective is indifferent to hedging costs, term premia in the different markets, along with transaction costs, are fundamental determinants of the optimal hedge. Our results also show that to reduce risk properly and to keep hedging costs low, a rich-enough universe of hedging instruments is critical. Through out-of-sample testing we validate the findings of the in-sample analysis, and importantly, we show that the model is robust enough to be used on real market data. The proposed framework offers great flexibility regarding the distributional assumptions of the underlying risk factors and the types of hedging instruments which can be included in the optimization model.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2645-6
Issue No: Vol. 266, No. 1-2 (2018)

• Rethinking economic capital management through the integrated
derivative-based treatment of interest rate and credit risk
• Authors: Mariya Gubareva; Maria Rosa Borges
Pages: 71 - 100
Abstract: This research revisits the economic capital management regarding banking books of financial institutions exposed to the emerging market sovereign debt. We develop a derivative-based integrated approach to quantify economic capital requirements for considered jointly interest rate and credit risk. Our framework represents a major contribution to the empirical aspects of capital management. The proposed innovative modeling allows applying standard historic value-at-risk techniques developed for stand-alone risk factors to evaluate aggregate impacts of several risks. We use the time-series of credit default swap spreads and interest rate swap rates as proxy measures for credit risk and interest rate risk, respectively. An elasticity of interest rate risk and credit risk, considered a function of the business cycle phases, maturity of instruments, creditworthiness, and other macroeconomic parameters, is gauged by means of numerical modeling. Our contribution to the new economic thinking regarding the interest rate risk and credit rate risk management consists in their integrated treatment as the dynamics of interest rate and credit spreads is found to demonstrate the features of automatic stabilizers of each other. This research sheds light on how financial institutions may address hedge strategies against downside risks. It is of special importance for emerging markets heavily dependent on foreign capital as it potentially allows emerging market banks to improve risk management practices in terms of capital adequacy and Basel III rules. From the regulatory perspective, by taking into account inter-risk diversification effects it allows enhancing financial stability through jointly optimizing Pillar 1 and Pillar 2 economic capital.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2438-y
Issue No: Vol. 266, No. 1-2 (2018)

• Pricing derivatives on multiple assets: recombining multinomial trees
based on Pascal’s simplex
• Authors: Dirk Sierag; Bernard Hanzon
Pages: 101 - 127
Abstract: In this paper a direct generalisation of the recombining binomial tree model by Cox et al. (J Financ Econ 7:229–263, 1979) based on the Pascal’s simplex is constructed. This discrete model can be used to approximate the prices of derivatives on multiple assets in a Black–Scholes market environment. The generalisation keeps most aspects of the binomial model intact, of which the following are the most important: The direct link to the Pascal’s simplex (which specialises to Pascal’s triangle in the binomial case); the matching of moments of the (log-transformed) process; convergence to the correct option prices both for European and American options, when the time step length goes to zero and the completeness of the model, at least for sufficiently small time step. The goal of this paper is to present basic theoretical aspects of this approach. However, we also illustrate the approach by a number of example calculations. Further possible developments of this approach are discussed in a final section.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2655-4
Issue No: Vol. 266, No. 1-2 (2018)

• An analytical approximation for single barrier options under stochastic
volatility models
• Authors: Hideharu Funahashi; Tomohide Higuchi
Pages: 129 - 157
Abstract: The aim of this paper is to derive an approximation formula for a single barrier option under local volatility models, stochastic volatility models, and their hybrids, which are widely used in practice. The basic idea of our approximation is to mimic a target underlying asset process by a polynomial of the Wiener process. We then translate the problem of solving first hit probability of the asset process into that of a Wiener process whose distribution of passage time is known. Finally, utilizing the Girsanov’s theorem and the reflection principle, we show that single barrier option prices can be approximated in a closed-form. Furthermore, ample numerical examples will show the accuracy of our approximation is high enough for practical applications.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2559-3
Issue No: Vol. 266, No. 1-2 (2018)

• Convexity adjustment for constant maturity swaps in a multi-curve
framework
• Authors: Nikolaos Karouzakis; John Hatgioannides; Kostas Andriosopoulos
Pages: 159 - 181
Abstract: In this paper we propose a double curving setup with distinct forward and discount curves to price constant maturity swaps (CMS). Using separate curves for discounting and forwarding, we develop a new convexity adjustment, by departing from the restrictive assumption of a flat term structure, and expand our setting to incorporate the more realistic and even challenging case of term structure tilts. We calibrate CMS spreads to market data and numerically compare our adjustments against the Black and SABR (stochastic alpha beta rho) CMS adjustments widely used in the market. Our analysis suggests that the proposed convexity adjustment is significantly larger compared to the Black and SABR adjustments and offers a consistent and robust valuation of CMS spreads across different market conditions.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2430-6
Issue No: Vol. 266, No. 1-2 (2018)

• Recent advancements in robust optimization for investment management
• Authors: Jang Ho Kim; Woo Chang Kim; Frank J. Fabozzi
Pages: 183 - 198
Abstract: Robust optimization has become a widely implemented approach in investment management for incorporating uncertainty into financial models. The first applications were to asset allocation and equity portfolio construction. Significant advancements in robust portfolio optimization took place since it gained popularity almost two decades ago for improving classical models on portfolio optimization. Recently, studies applying the worst-case framework to bond portfolio construction, currency hedging, and option pricing have appeared in the practitioner-oriented literature. Our focus in this paper is on recent advancements to categorize robust optimization models into asset allocation at the asset class level and portfolio selection at the individual asset level, and we further separate robust portfolio selection approaches specific to each asset class. This organization provides a clear overview on how robust optimization is extensively implemented in investment management.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2573-5
Issue No: Vol. 266, No. 1-2 (2018)

• Robust risk budgeting
• Authors: Michalis Kapsos; Nicos Christofides; Berc Rustem
Pages: 199 - 221
Abstract: Risk based portfolio construction and particular risk parity or equally weighted risk contribution became popular among practitioners. These approaches focus only on risk and are agnostic with respect to the expected returns. In this paper, we consider risk budgeting; a generalization of risk parity. We propose an alternative formulation that is more efficient computationally. We introduce the robust risk budgeting, a robust variant of the standard risk budgeting that deals with the uncertainty in the input parameters. We show that the problem remains tractable under different types of uncertainty. We evaluate the proposed framework on real data and we observe a positive premium associated with the robust variant.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2469-4
Issue No: Vol. 266, No. 1-2 (2018)

• On robust portfolio and naïve diversification: mixing ambiguous and
unambiguous assets
• Authors: A. Burak Paç; Mustafa Ç. Pınar
Pages: 223 - 253
Abstract: Effect of the availability of a riskless asset on the performance of naïve diversification strategies has been a controversial issue. Defining an investment environment containing both ambiguous and unambiguous assets, we investigate the performance of naïve diversification over ambiguous assets. For the ambiguous assets, returns follow a multivariate distribution involving distributional uncertainty. A nominal distribution estimate is assumed to exist, and the actual distribution is considered to be within a ball around this nominal distribution. Complete information is assumed for the return distribution of unambiguous assets. As the radius of uncertainty increases, the optimal choice on ambiguous assets is shown to converge to the uniform portfolio with equal weights on each asset. The tendency of the investor to avoid ambiguous assets in response to increasing uncertainty is proven, with a shift towards unambiguous assets. With an application on the $$\textit{CVaR}$$ risk measure, we derive rules for optimally combining uniform ambiguous portfolio with the unambiguous assets.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2619-8
Issue No: Vol. 266, No. 1-2 (2018)

• Risk minimization in multi-factor portfolios: What is the best
strategy'
• Authors: Philipp J. Kremer; Andreea Talmaciu; Sandra Paterlini
Pages: 255 - 291
Abstract: Exposures to risk factors, as opposed to individual securities or bonds, can lead to an ex-ante improved risk management and a more transparent and cheaper way of developing active asset allocation strategies. This paper provides an extensive analysis of eight state-of-the-art risk-minimization schemes and compares risk factor performance in a conditional performance analysis, contrasting good and bad states of the economy. The investment universe spans a total of 25 risk factors, including size, momentum, value, high profitability and low investments, from five non-overlapping regions (i.e., USA, UK, Japan, Developed Europe ex. UK and, Asia ex. Japan). Considering as investment period the interval from May 2004 to June 2015, our results show that each single factor yields positive premia in exchange for risk, which can lead to considerable underperformance and extensive recovery periods during times of crisis. The best factor investments can be found in Asia ex. Japan and the US. However, risk factor based portfolio construction across the various regions enables the investor to exploit low correlation structures, reducing the overall volatility, as well as tail- and extreme risk measures. Finally, the empirical results point towards the long-only global minimum variance portfolio, as the best risk minimization strategy.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2467-6
Issue No: Vol. 266, No. 1-2 (2018)

• Robust equity portfolio performance
• Authors: Jang Ho Kim; Woo Chang Kim; Do-Gyun Kwon; Frank J. Fabozzi
Pages: 293 - 312
Abstract: The earliest documented analytical approach to portfolio selection is Markowitz’s mean–variance analysis, which attempts to find the portfolio with optimal performance by considering the tradeoff between return and risk. The performance of mean–variance analysis has been the subject of many studies and compared to other portfolio construction approaches such as a naïve equally-weighted allocation scheme. In recent years, several approaches have been proposed to improve the mean–variance model by reducing the sensitivity of the portfolio selection process in order achieve robust performance. Although robust portfolio optimization has been one of the most researched methods for improving portfolio robustness, the performance of robust portfolios has not been the major focus of studies. In this paper, a comprehensive analysis on robust portfolio performance is presented for equity portfolios constructed in the U.S. market during the period 1980 and 2014, and results confirm the advantage of robust portfolio optimization for controlling uncertainty while efficiently allocating investments.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2739-1
Issue No: Vol. 266, No. 1-2 (2018)

• Constant proportion portfolio insurance in defined contribution pension
plan management
• Authors: Busra Zeynep Temocin; Ralf Korn; A. Sevtap Selcuk-Kestel
Pages: 329 - 348
Abstract: We consider the optimal portfolio problem with minimum guarantee protection in a defined contribution pension scheme. We compare various versions of guarantee concepts in a labor income coupled CPPI-framework with random future labor income. Besides classical deterministic guarantees we also introduce path-dependent guarantees. To ensure that there is no bias in the comparison, we obtain the optimal CPPI-multiplier for each guarantee framework via using a classical stochastic control approach.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2449-8
Issue No: Vol. 266, No. 1-2 (2018)

• Tracking hedge funds returns using sparse clones
• Authors: Margherita Giuzio; Kay Eichhorn-Schott; Sandra Paterlini; Vincent Weber
Pages: 349 - 371
Abstract: Whether hedge fund returns could be attributed to systematic risk exposures rather than managerial skills is an interesting debate among academics and practitioners. Academic literature suggests that hedge fund performance is mostly determined by alternative betas, which justifies the construction of investable hedge fund clones or replicators. Practitioners often claim that management skills are instrumental for successful performance. In this paper, we study the risk exposure of different hedge fund indices to a set of liquid asset class factors by means of style analysis. We extend the classical style analysis framework by including a penalty that allows to retain only relevant factors, dealing effectively with collinearity, and to capture the out-of-sample properties of hedge fund indices by closely mimicking their returns. In particular, we introduce a Log-penalty and discuss its statistical properties, showing then that Log-clones are able to closely track the returns of hedge fund indices with a smaller number of factors and lower turnover than the clones built from state-of-art methods.
PubDate: 2018-07-01
DOI: 10.1007/s10479-016-2371-5
Issue No: Vol. 266, No. 1-2 (2018)

• Portfolio management with benchmark related incentives under mean
reverting processes
• Authors: Marco Nicolosi; Flavio Angelini; Stefano Herzel
Pages: 373 - 394
Abstract: We study the problem of a fund manager whose compensation depends on the relative performance with respect to a benchmark index. In particular, the fund manager’s risk-taking incentives are induced by an increasing and convex relationship of fund flows to relative performance. We consider a dynamically complete market with N risky assets and the money market account, where the dynamics of the risky assets exhibit mean reversions, either in the drift or in the volatility. The manager optimizes the expected utility of the final wealth, with an objective function that is non-concave. The optimal solution is found by using the martingale approach and a concavification method. The optimal wealth and the optimal strategy are determined by solving a system of Riccati equations. We provide a semi-closed solution based on the Fourier transform.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2535-y
Issue No: Vol. 266, No. 1-2 (2018)

• Are financial ratios relevant for trading credit risk' Evidence from
the CDS market
• Authors: George Chalamandaris; Nikos E. Vlachogiannakis
Pages: 395 - 440
Abstract: We propose a combination of LASSO with panel-consistent estimation methods to investigate whether financial ratios are used in the decision-making process of CDS traders. Our results indicate that financial statement information does play a role in all the trading horizons surrounding the announcement date and the corresponding styles. These include pro-active analysts trying to predict quarterly results, news traders reacting to unanticipated information and value traders who fine-tune their estimates and act accordingly at a later stage. Our findings also suggest that CDS traders respond asymmetrically to financial ratio updates of different sign and intensity.
PubDate: 2018-07-01
DOI: 10.1007/s10479-016-2373-3
Issue No: Vol. 266, No. 1-2 (2018)

• Interdependencies between CDS spreads in the European Union: Is Greece the
black sheep or black swan'
• Authors: Dimitrios Koutmos
Pages: 441 - 498
Abstract: This paper dissects the dynamic interdependencies between credit default swap spreads among several European Union (EU) countries (Belgium, Bulgaria, Croatia, France, Germany, Greece, Hungary, Italy, Portugal, Romania, Slovakia, and Spain) during the period between October 2004 and July 2016. Its purpose is to delineate interdependence patterns in credit risk in order to identify whether a particular country, such as Greece, or a group of countries, disproportionately transmit credit risk to the remaining sampled EU countries. The findings herein show that the interdependencies between countries’ credit risks are heterogeneous across time. Specifically, when mapping credit risk transmission channels during the 2008–2009 financial crisis and 2011–2013 European debt crisis, respectively, it is evident that transmission patterns shift whereby some countries transmit more credit risk than others. Finally, despite recent news headlines, it cannot be shown empirically that Greece is the dominant transmission catalyst for shocks in the credit risks of the remaining sampled EU countries.
PubDate: 2018-07-01
DOI: 10.1007/s10479-018-2788-0
Issue No: Vol. 266, No. 1-2 (2018)

• On Chinese stock markets: How have they evolved over time'
• Authors: Sebastián Cano-Berlanga; José-Manuel Giménez-Gómez
Pages: 499 - 510
Abstract: China is the largest emerging capital market with a unique setup: it issues simultaneously both (i) Class A shares addressed to Chinese domestic investors, and (ii) Class B Shares addressed to foreign investors. After Chinese stock market resumed the operation, they feature dramatic fluctuations due to policy changes and over-speculative activity of individual investors. This paper aims to analyse the evolution of both the Shanghai A and B Markets through a Markov-switching asymmetric GARCH in four different time frames.
PubDate: 2018-07-01
DOI: 10.1007/s10479-017-2602-4
Issue No: Vol. 266, No. 1-2 (2018)

• The effects of sector reforms on the productivity of Greek banks: a
step-by-step analysis of the pre-Euro era
• Authors: Panagiotis Tziogkidis; Kent Matthews; Dionisis Philippas
Pages: 531 - 549
Abstract: The paper analyses the effects on the productivity of Greek commercial banks of sector regulatory reforms in the pre-Euro era, using the Global Malmquist Index. In a bootstrap Data Envelopment Analysis framework, we propose an alternative to smoothing that utilises the Pearson system random number generator, offering greater flexibility in the choice of the fitting distribution. In the context of a step-by-step approach, we demonstrate the contribution of deregulatory commercial freedoms to greater productivity and the negative effect of prudential controls. Our findings offer insights into the current state of the Greek banking sector, suggesting that the imposition of additional prudential controls may have a detrimental impact on the productivity of Greek banks, given the adverse business conditions.
PubDate: 2018-07-01
DOI: 10.1007/s10479-016-2381-3
Issue No: Vol. 266, No. 1-2 (2018)

• Assessing efficiency profiles of UK commercial banks: a DEA analysis with
regression-based feedback
• Authors: Jamal Ouenniche; Skarleth Carrales
Pages: 551 - 587
Abstract: Data envelopment analysis (DEA) has witnessed increasing popularity in banking studies since 1985. In this paper, we propose a new DEA-based analysis framework with a regression-based feedback mechanism, where regression analysis provides DEA with feedback that informs about the relevance of the inputs and the outputs chosen by the analyst. Unlike previous studies, the DEA models used within the proposed framework could use both inputs and outputs, only inputs, or only outputs. So far, the UK banking sector remains relatively under researched despite its crucial importance to the UK economy. We use the proposed framework to address several research questions related to both the efficiency of the UK commercial banking sector and DEA analyses with and without regression-based feedback. Empirical results suggest that, on average, the commercial banks operating in the UK—whether domestic or foreign—are yet to achieve acceptable levels of overall technical efficiency, pure technical efficiency, and scale efficiency. On the other hand, DEA analyses with and without a linear regression-based feedback mechanism seem to provide consistent findings; however, in general DEA analyses without feedback tend to over- or under-estimate efficiency scores depending on the orientation of the analyses. Furthermore, in general, a linear regression-based feedback mechanism proves effective at improving discrimination in DEA analyses unless the initial choice of inputs and outputs is well informed.
PubDate: 2018-07-01
DOI: 10.1007/s10479-018-2797-z
Issue No: Vol. 266, No. 1-2 (2018)

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