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Financial Applications of Markov Chain Monte Carlo Methods

Graflund, Andreas LU (2002) In Lund Economic Studies 100.
Abstract (Swedish)
Popular Abstract in Swedish

Avhandlingen omfattar fyra artiklar inom empirisk finansiell ekonomi. Det första kapitlet är en kort sammanfattning av avhandlingens innehåll.



Det andra kapitlet, Dynamic Portfolio Selection: The Relevance of Switching Regimes and Investment Horizon. (samförfattad med Birger Nilsson) undersöker dynamiskt portföljval och efterfrågan på tidsdiversifiering då aktieavkastningarna följer en regimskiftsmodell. Investeringsalternativen utgörs av en väl-diversifierad hemmamarknadsportfölj samt en riskfri tillgång. Våra resultat understryker den ekonomiska vikten av regimer eftersom de optimala portföljvikterna är uppenbart beroende av regimerna. Vi visar att efterfrågan på... (More)
Popular Abstract in Swedish

Avhandlingen omfattar fyra artiklar inom empirisk finansiell ekonomi. Det första kapitlet är en kort sammanfattning av avhandlingens innehåll.



Det andra kapitlet, Dynamic Portfolio Selection: The Relevance of Switching Regimes and Investment Horizon. (samförfattad med Birger Nilsson) undersöker dynamiskt portföljval och efterfrågan på tidsdiversifiering då aktieavkastningarna följer en regimskiftsmodell. Investeringsalternativen utgörs av en väl-diversifierad hemmamarknadsportfölj samt en riskfri tillgång. Våra resultat understryker den ekonomiska vikten av regimer eftersom de optimala portföljvikterna är uppenbart beroende av regimerna. Vi visar att efterfrågan på tidsdiversifiering är en mer komplicerad frågeställning än vad som antyds i tidigare forskning, eftersom eftefrågan beror på regimerna. Resultaten är kvalitativt oförändrade för de fyra största aktiemarknaderna i världen. USA, Stiorbrittkaninen, Japan och Tyskland.



Det tredje kapitlet, Empirical Probability Distributions of Real Return from swedish Stock and Bond Porfolios, introduceras ett nytt icke parametrisk ansats för att integrera empiriska sannolikhetsfunktioner för realavkastningar för olika investeringshorisonter samt fem Svenska aktie- och obligationsportföljer. I ansatsen reduceras problemet till att generera nya utfall från en känd emprisk markovkedja. Vi finner att aktier ger omkring 7,5 procents realavkastning och obligationer omkring 3,0 procent. Resultaten visar att en långsiktig investerare bör undvika att enbart investera i obligationer. Om målet med investeringen är att minimera risken för att investeringen skall falla i realt värde så bör den långsiktiga portföljen bestå av en mix av aktier och obligationer.



Det fjärde kapitlet. A Bayesian Inference Approcah to Testing Mean Reversion in the Swedish Stock Market, används en Bayesiansk ansats för att testa om den svenska aktiemarknaden under åren 918-1998 har en lägre relativ risk med ökad investeringshorisont. Tidigare forskning har visat att så är fallet. Vi beskriver den tidsvarierande risken på aktiemarknaden med en regimedskiftsmodell, med en lugnt och en volatilt tillstånd, och finner inget statistiskt stöd för att den relativa risken skall minska med investeringshorisonten utan snarare att aktiemarknaden ter sig slumpmässig. Detta resultat är i linje med liknande forskning på den amerikanska aktiemarknaden.



I det sista kapitlet, A Swedish Real Estate Stock Market Index, 1939-1998, presenteras ett nytt svenskt aktieindex för fastighetsbolag på månadsbasis från 1939 till nutid. Kapitlet beskriver noggrant konstruktionen av indexet tillsammans med generell statistik. Vi finner att finanskrisen 1990-92 och den efterföljande ekonomiska oron hade en mycket stor negativ påverkan på fastighetsaktierna. Vidare ökar belåningsgraden under de sista två decennierna av den undersökta perioden och ökningen är speciellt stor udner fastighetskrisen i början av 90-talet. Fastighetsindexet har en lägre risk än aktiemarknaden i helhet. De nykonstruerade indexet är ett värdefullt datamaterial och skapar framtida forskningsmöjligheter inom finansiell ekonomi men även andra discipliner. (Less)
Abstract
This thesis consists of four empirical studies on financial economics. The first chapter contains a short summary of the thesis. The second chapter Dynamic Portfolio Selection: The Relevance of Switching Regimes and Investment Horizon (co-authored with Birger Nilsson) investigates the questions of dynamic portfolio selection and intertemporal hedging within a Markovian regime-switching framework. The investment opportunity set is spanned by a well-diversified home-market portfolio and the risk-free asset. Our results highlight the economic importance of regimes, as optimal portfolio weights are clearly dependent on the prevailing regime. We present evidence that the question of intertemporal hedging is a more complex issue than is hinted... (More)
This thesis consists of four empirical studies on financial economics. The first chapter contains a short summary of the thesis. The second chapter Dynamic Portfolio Selection: The Relevance of Switching Regimes and Investment Horizon (co-authored with Birger Nilsson) investigates the questions of dynamic portfolio selection and intertemporal hedging within a Markovian regime-switching framework. The investment opportunity set is spanned by a well-diversified home-market portfolio and the risk-free asset. Our results highlight the economic importance of regimes, as optimal portfolio weights are clearly dependent on the prevailing regime. We present evidence that the question of intertemporal hedging is a more complex issue than is hinted in the previous literature, since demand for intertemporal hedging is present in some regimes, but not in others. Finally, our findings are qualitatively unchanged across the four largest stock markets in the in the world, the US, Japan, the UK and Germany. The third chapter, Empirical Probability Distributions of Real Return from Swedish Stock and Bond Portfolios, introduces a new non-parametric approach to integrate empirical probability functions of the real return for different investment horizons for five portfolios of Swedish stocks and bonds. In our setting the problem reduces to generating new generalizations from a known empirical Markov chain. We find that the stocks yield a real return of about 7.5 percent and bonds about 3.0 percent. Our results suggest that an investor ought to avoid bonds in the long run. Finally if the investors’ goal is to minimize the risk of capital destruction the preferable long run passive portfolio is a mix of bonds and stocks. The fourth chapter, A Bayesian Inference Approach to Testing Mean Reversion in the Swedish Stock Market, utilize a Bayesian approach to test for mean reversion in the Swedish stock market on monthly data 1918-1998. By simply account for the heteroscedasticity of the data with a two-state hidden Markov model of normal distributions and taking estimation bias into account via Gibbs sampling we cannot find support of mean reversion. This is a contradiction to previous result from Sweden. We find that a tranquil and a volatile regime can characterize the Swedish stock market and within the regimes the stock market is random. This finding of randomness is in line with recent evidence for the U.S. stock market. In the final chapter, A Swedish Real Estate Stock Market Index, 1939-1998, presents a new index for Sweden computed using a new time-series of 60 years of monthly returns of real estate stocks from 1939 to the present. The computation of the index is explained along with some general statistics. We find that the financial crisis of 1990-92 and the subsequent economic turmoil had a devastating effect on the real estate stock market. The returns are subject to kurtosis and skewness, especially during the last decade of the period. The Swedish real estate stock market was less sensitive than the Swedish stock market index. This new index offers a valuable data set for future research in financial economics as well as other disciplines. (Less)
Please use this url to cite or link to this publication:
author
opponent
  • Professor Knif, Johan
organization
publishing date
type
Thesis
publication status
published
subject
keywords
Finansiering, Financial science, ekonomiska system, ekonomisk politik, ekonomisk teori, Nationalekonomi, economic policy, economic systems, economic theory, Economics, econometrics, Mean Reversion, Diversification, Real Estate Stocks, Markov Chain Monte Carlo Methods, Stock Markets, ekonometri
in
Lund Economic Studies
volume
100
pages
100 pages
publisher
Department of Economics, Lund Universtiy
defense location
EC 211 , Holger Crafoords Ekonomicentrum.
defense date
2002-03-21 15:15
ISSN
0460-0029
language
English
LU publication?
yes
id
6fa41127-38cb-4eab-a6f5-0ce7f7f4d64a (old id 464475)
date added to LUP
2007-09-27 11:24:01
date last changed
2016-09-19 08:44:52
@phdthesis{6fa41127-38cb-4eab-a6f5-0ce7f7f4d64a,
  abstract     = {This thesis consists of four empirical studies on financial economics. The first chapter contains a short summary of the thesis. The second chapter Dynamic Portfolio Selection: The Relevance of Switching Regimes and Investment Horizon (co-authored with Birger Nilsson) investigates the questions of dynamic portfolio selection and intertemporal hedging within a Markovian regime-switching framework. The investment opportunity set is spanned by a well-diversified home-market portfolio and the risk-free asset. Our results highlight the economic importance of regimes, as optimal portfolio weights are clearly dependent on the prevailing regime. We present evidence that the question of intertemporal hedging is a more complex issue than is hinted in the previous literature, since demand for intertemporal hedging is present in some regimes, but not in others. Finally, our findings are qualitatively unchanged across the four largest stock markets in the in the world, the US, Japan, the UK and Germany. The third chapter, Empirical Probability Distributions of Real Return from Swedish Stock and Bond Portfolios, introduces a new non-parametric approach to integrate empirical probability functions of the real return for different investment horizons for five portfolios of Swedish stocks and bonds. In our setting the problem reduces to generating new generalizations from a known empirical Markov chain. We find that the stocks yield a real return of about 7.5 percent and bonds about 3.0 percent. Our results suggest that an investor ought to avoid bonds in the long run. Finally if the investors’ goal is to minimize the risk of capital destruction the preferable long run passive portfolio is a mix of bonds and stocks. The fourth chapter, A Bayesian Inference Approach to Testing Mean Reversion in the Swedish Stock Market, utilize a Bayesian approach to test for mean reversion in the Swedish stock market on monthly data 1918-1998. By simply account for the heteroscedasticity of the data with a two-state hidden Markov model of normal distributions and taking estimation bias into account via Gibbs sampling we cannot find support of mean reversion. This is a contradiction to previous result from Sweden. We find that a tranquil and a volatile regime can characterize the Swedish stock market and within the regimes the stock market is random. This finding of randomness is in line with recent evidence for the U.S. stock market. In the final chapter, A Swedish Real Estate Stock Market Index, 1939-1998, presents a new index for Sweden computed using a new time-series of 60 years of monthly returns of real estate stocks from 1939 to the present. The computation of the index is explained along with some general statistics. We find that the financial crisis of 1990-92 and the subsequent economic turmoil had a devastating effect on the real estate stock market. The returns are subject to kurtosis and skewness, especially during the last decade of the period. The Swedish real estate stock market was less sensitive than the Swedish stock market index. This new index offers a valuable data set for future research in financial economics as well as other disciplines.},
  author       = {Graflund, Andreas},
  issn         = {0460-0029},
  keyword      = {Finansiering,Financial science,ekonomiska system,ekonomisk politik,ekonomisk teori,Nationalekonomi,economic policy,economic systems,economic theory,Economics,econometrics,Mean Reversion,Diversification,Real Estate Stocks,Markov Chain Monte Carlo Methods,Stock Markets,ekonometri},
  language     = {eng},
  pages        = {100},
  publisher    = {Department of Economics, Lund Universtiy},
  school       = {Lund University},
  series       = {Lund Economic Studies},
  title        = {Financial Applications of Markov Chain Monte Carlo Methods},
  volume       = {100},
  year         = {2002},
}