This article analyzes optimal, dynamic portfolio and wealth/consumption policies of utility maximizing investors who must also manage market-risk exposure using Value-at-Risk (VaR). We find that VaR risk managers often optimally choose a larger to risky assets than non-risk consequently incur losses when occur. suggest an alternative risk-management model, based on the expectation loss, remedy shortcomings VaR. A general-equilibrium analysis reveals presence amplifies stock-market volatility...

Journal Article Dynamic Mean-Variance Asset Allocation Get access Suleyman Basak, Basak London Business School and CEPR, Institute of Finance Accounting Search for other works by this author on: Oxford Academic Google Scholar Georgy Chabakauri Economics, Department The Review Financial Studies, Volume 23, Issue 8, August 2010, Pages 2970–3016, https://doi.org/10.1093/rfs/hhq028 Published: 18 May 2010

ABSTRACT We analyze how institutional investors entering commodity futures markets, referred to as the financialization of commodities, affect prices. Institutional care about their performance relative a index. find that all prices, volatilities, and correlations go up with financialization, but more so for index than nonindex futures. The equity‐commodity also increase. demonstrate financial markets transmit shocks not only prices spot inventories. Spot any spill over storable

This article solves the equilibrium problem in a pure-exchange, continuous-time economy which some agents face information costs or other types of frictions effectively preventing them from investing stock market. Under assumption that restricted have logarithmic utilities, complete characterization prices and consumption/investment policies is provided. A simple calibration shows model can help resolve empirical asset pricing puzzles.

We consider an economy populated by institutional investors alongside standard retail investors. Institutions care about their performance relative to a certain index. Our framework is tractable, admitting exact closed-form expressions, and produces the following analytical results. find that institutions tilt portfolios towards stocks compose benchmark The resulting price pressure boosts index stocks. By demanding more risky than investors, amplify stock volatilities aggregate market...

ABSTRACT We develop a dynamic model of belief dispersion with continuum investors differing in beliefs. The is tractable and qualitatively matches many the empirical regularities stock price its mean return, volatility, trading volume. find that convex cash‐flow news increases dispersion, while return decreases when view on optimistic, vice versa pessimistic. Moreover, leads to higher volatility demonstrate otherwise identical two‐investor heterogeneous‐beliefs economies do not necessarily...

This article investigates a fund manager's risk-taking incentives induced by an increasing and convex relationship of flows to relative performance. In dynamic portfolio choice framework, we show that the ensuing convexities in objective give rise finite risk-shifting range over which she gambles finish ahead her benchmark. Such gambling entails either increase or decrease volatility portfolio, depending on risk tolerance. latter case, manager reduces holdings risky asset despite its...

This article develops a general equilibrium, continuous time model where portfolio constraints generate mispricing between redundant securities. Constrained consumption-portfolio optimization techniques are adapted to incorporate redundant, possibly mispriced Under logarithmic preferences, we provide explicit conditions for and closed-form expressions all economic quantities. Existence of an equilibrium occurs with positive probability is verified in specific case. In more setting,...

This article examines the effects of portfolio insurance on market and asset price dynamics in a general equilibrium continuous-time model. Portfolio insurers are modeled as expected utility maximizing agents. Martingale methods employed solving individual agents' dynamic consumption-portfolio problems. Comparisons made between optimal consumption processes, optimally invested wealth strategies "normal agents". At level, comparisons across economies reveal that volatility risk premium...

Portfolio theory must address the fact that, in reality, portfolio managers are evaluated relative to a benchmark, and therefore adopt risk management practices account for benchmark performance. We capture this consideration by allowing prespecified shortfall from target benchmark-linked return, consistent with growing interest such practice. In dynamic setting, we demonstrate how risk-averse manager optimally under- or overperforms under different economic conditions, depending on his...

ABSTRACT This paper analyzes the dynamic portfolio choice implications of strategic interaction among money managers who compete for fund flows. We study such between two risk‐averse in continuous time, characterizing analytically their unique equilibrium investments. Driven by chasing and contrarian mechanisms when one is well ahead, they gamble opposite direction performance close. also examine multiple mixed‐strategy equilibria. Equilibrium policy each manager crucially depends on...

This article analyzes optimal, dynamic portfolio and wealth/consumption policies of utility maximizing investors who must also manage market-risk exposure using Value-at-Risk (VaR). We find that VaR risk managers often optimally choose a larger to risky assets than non managers, consequently incur losses, when losses occur. suggest an alternative risk-management model, based on the expectation loss, remedy shortcomings VaR. A general-equilibrium analysis reveals presence amplifies...

A sharp increase in the popularity of commodity investing past decade has triggered an unprecedented inflow institutional funds into futures markets, referred to as financialization commodities. In this paper, we explore effects a model that features investors alongside traditional markets participants. The care about their performance relative index. We find presence prices and volatilities all go up, but more so for index than nonindex ones. correlations amongst well equity-commodity also...

Abstract We develop a dynamic model of costly stock short-selling and lending market obtain implications that simultaneously support many empirical regularities related to short-selling. In our model, investors’ belief disagreement leads shorting demand, whereby short-sellers pay fees borrow stocks from lenders. Our main novel results are as follows. Short interest is positively fee predicts returns negatively. Higher risk can be associated with lower less activity. Stock volatility...

Mean-variance criteria remain prevalent in multi-period problems, and yet not much is known about their dynamically optimal policies. We provide a fully analytical characterization of the dynamic mean-variance portfolios within general incomplete-market economy, recover simple structure that also inherits several conventional properties static models. identify probability measure incorporates intertemporal hedging demands facilitates tractability explicit computation portfolios. solve...

We provide fully analytical, optimal dynamic hedges in incomplete markets by employing the traditional minimum-variance criterion. Our are terms of generalized "Greeks" and naturally extend no-arbitrage–based risk management complete to markets. Whereas literature characterizes either static, myopic, or from which a hedger may deviate unless able precommit, our time-consistent. apply results derivatives replication with infrequent trading determine values, reduce Black-Scholes expressions...

This paper investigates a fund manager's risk-taking incentives induced by an increasing and convex fund-flows to relative-performance relationship. In dynamic portfolio choice framework, we show that the ensuing convexities in objective give rise finite risk-shifting range over which she gambles finish ahead of her benchmark. Such gambling entails either increase or decrease volatility portfolio, depending on risk tolerance. latter case, manager reduces holdings risky asset despite its...

This article analyses the implications of money illusion for investor behaviour and asset prices in a securities market economy with inflationary fluctuations. We provide belief-based formulation which accounts systematic mistakes evaluating real nominal quantities. The impact on security their dynamics is demonstrated to be considerable even though its welfare cost investors small typical environments. A money-illusioned investor's consumption shown generally depend price level,...

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