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S&P 500 Index option-based volatility indexes have untenable risk-return profiles. These volatility indexes are not designed with consideration of important real-world risk characteristics of options and fail to represent volatility as a differentiated asset-class with relevance to the long-term...
Persistent link: https://www.econbiz.de/10012865881
We show theoretically and empirically that flows into index funds raise the prices of large stocks in the index disproportionately more than the prices of small stocks. Conversely, flows predict a high future return of the small-minus-large index portfolio. This finding runs counter to the CAPM,...
Persistent link: https://www.econbiz.de/10013250648
The first generation of indexing started with plain vanilla market-cap weighted indices. Based on the 1st generation of indexing, "smarter" approaches to equity beta were created, which are nowadays marketed as "Smart Beta" indices (2nd generation). Nevertheless these still exhibit severe...
Persistent link: https://www.econbiz.de/10013032110
We present a general equilibrium model in which heterogeneous investors choose among bonds, stocks, and an Index Fund holding the market portfolio. We show that, under standard assumptions, an equilibrium exists. We then derive predictions for equilibrium asset prices, investor behavior, and...
Persistent link: https://www.econbiz.de/10014255122
Estimation constitutes a major challenge in the implementation of mean-variance portfolios. To overcome this, we propose a partial index-tracking strategy that aims to mitigate estimation error ex-ante. Theoretically, we minimize the mean-square error of the proposed strategy by shrinking the...
Persistent link: https://www.econbiz.de/10013229725
Index tracking aims at determining an optimal portfolio that replicates the performance of an index or benchmark by investing in a smaller number of constituents or assets. The tracking portfolio should be cheap to maintain and update, i.e., invest in a smaller number of constituents than the...
Persistent link: https://www.econbiz.de/10013106053
We present a framework for deciding when to choose an alternative to passively investing in capitalization-weighted indices within any particular asset class. Five reasons are identified for seeking an alternative. Three of these reflect situations where a capitalization-weighted index is either...
Persistent link: https://www.econbiz.de/10012976468
We focus on the stock selection step of the index tracking problem in passive investment management and incorporate constant changes in the dynamics of markets into the decision. We propose an approach, using machine learning techniques, which analyzes the performance of the selection methods...
Persistent link: https://www.econbiz.de/10013212228
Oil, also called black gold, is considered as the commodity which has the greatest impact on the world's economy, and it has been studied in terms of its relationship and effects on macroeconomic variables such as Gross Domestic Product (GDP), inflation, trade balance, exchange rate and some...
Persistent link: https://www.econbiz.de/10012321133
This paper extends the notion of variance optimal hedging of contingent claims under the incomplete market setting to the hedging of entire processes, and applies the results to the problem of tracking stock indices. Sufficient conditions under which this is possible are given, along with the...
Persistent link: https://www.econbiz.de/10012998064