Modern Portfolio Theory 1
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A Sentiment Analysis Approach to the Prediction of Market Volatility
A Sentiment Analysis Approach to the Prediction of Market Volatility JUSTINA DEVEIKYTE, Dept. of Computer Science & Information Systems Birkbeck, University of London HELYETTE GEMAN, Dept. of Economics, Mathematics & Statistics Birkbeck, University of London CARLO PICCARI, Dept. of Economics, Mathematics & Statistics Birkbeck, University of London ALESSANDRO PROVETTI, Dept. of Computer Science & Information Systems Birkbeck, University of London Prediction and quantification of future volatility and returns play an important role in financial modelling, both in portfolio optimization and risk management. Natural language processing today allows to process news and social media comments to detect signals of investors’ confidence. We have explored the relationship between sentiment extracted from financial news and tweets and FTSE100 movements. We investigated the strength of the correlation between sentiment measures on a given day and market volatility and returns observed the next day. The findings suggest that there is evidence of correlation between sentiment and stock market movements: the sentiment captured from news headlines could be used as a signal to predict market returns; the same does not apply for volatility. Also, in a surprising finding, for the sentiment found in Twitter comments we obtained a correlation coefficient of -0.7, and p-value below 0.05, which indicates a strong negative correlation between positive sentiment captured from the tweets on a given day and the volatility observed the next day. We developed an accurate classifier for the prediction of market volatility in response to the arrival of new information by deploying topic modelling, based on Latent Dirichlet Allocation, to extract feature vectors from a collection of tweets and financial news. -
Analysis of Securitized Asset Liquidity June 2017 an He and Bruce Mizrach1
Analysis of Securitized Asset Liquidity June 2017 An He and Bruce Mizrach1 1. Introduction This research note extends our prior analysis2 of corporate bond liquidity to the structured products markets. We analyze data from the TRACE3 system, which began collecting secondary market trading activity on structured products in 2011. We explore two general categories of structured products: (1) real estate securities, including mortgage-backed securities in residential housing (MBS) and commercial building (CMBS), collateralized mortgage products (CMO) and to-be-announced forward mortgages (TBA); and (2) asset-backed securities (ABS) in credit cards, autos, student loans and other miscellaneous categories. Consistent with others,4 we find that the new issue market for securitized assets decreased sharply after the financial crisis and has not yet rebounded to pre-crisis levels. Issuance is below 2007 levels in CMBS, CMOs and ABS. MBS issuance had recovered by 2012 but has declined over the last four years. By contrast, 2016 issuance in the corporate bond market was at a record high for the fifth consecutive year, exceeding $1.5 trillion. Consistent with the new issue volume decline, the median age of securities being traded in non-agency CMO are more than ten years old. In student loans, the average security is over seven years old. Over the last four years, secondary market trading volumes in CMOs and TBA are down from 14 to 27%. Overall ABS volumes are down 16%. Student loan and other miscellaneous ABS declines balance increases in automobiles and credit cards. By contrast, daily trading volume in the most active corporate bonds is up nearly 28%. -
MPFD Lesson 2B: Meeting Financial Goals—Rate of Return
Unit 2 Planning and Tracking Lesson 2B: Meeting Financial Goals—Rate of Return Rule 2: Have a Plan. Financial success depends primarily on two things: (i) developing a plan to meet your established goals and (ii) tracking your progress with respect to that plan. Too often peo - ple set vague goals (“I want to be rich.”), make unrealistic plans, or never bother to assess the progress toward their goals. These lessons look at important financial indicators you should understand and monitor both in setting goals and attaining them. Lesson Description Students are shown the two ways investments can earn a return and then calculate the annual rate of return, the real rate of return, and the expected rate of return on various assets. Standards and Benchmarks (see page 49) Grade Level 9-12 Concepts Appreciation Depreciation Expected rate of return Inflation Inflation rate Rate of return Real rate of return Return Making Personal Finance Decisions ©2019, Minnesota Council on Economic Education. Developed in partnership with the Federal Reserve Bank of St. Louis. Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Minnesota Council on Economic Education. 37 Unit 2: Planning and Tracking Lesson 2B: Meeting Financial Goals—Rate of Return Compelling Question How is an asset’s rate of return measured? Objectives Students will be able to • describe two ways that an asset can earn a return and • determine and distinguish among the rate of return on an asset, its real rate of return, and its expected rate of return. -
Asset Securitization
L-Sec Comptroller of the Currency Administrator of National Banks Asset Securitization Comptroller’s Handbook November 1997 L Liquidity and Funds Management Asset Securitization Table of Contents Introduction 1 Background 1 Definition 2 A Brief History 2 Market Evolution 3 Benefits of Securitization 4 Securitization Process 6 Basic Structures of Asset-Backed Securities 6 Parties to the Transaction 7 Structuring the Transaction 12 Segregating the Assets 13 Creating Securitization Vehicles 15 Providing Credit Enhancement 19 Issuing Interests in the Asset Pool 23 The Mechanics of Cash Flow 25 Cash Flow Allocations 25 Risk Management 30 Impact of Securitization on Bank Issuers 30 Process Management 30 Risks and Controls 33 Reputation Risk 34 Strategic Risk 35 Credit Risk 37 Transaction Risk 43 Liquidity Risk 47 Compliance Risk 49 Other Issues 49 Risk-Based Capital 56 Comptroller’s Handbook i Asset Securitization Examination Objectives 61 Examination Procedures 62 Overview 62 Management Oversight 64 Risk Management 68 Management Information Systems 71 Accounting and Risk-Based Capital 73 Functions 77 Originations 77 Servicing 80 Other Roles 83 Overall Conclusions 86 References 89 ii Asset Securitization Introduction Background Asset securitization is helping to shape the future of traditional commercial banking. By using the securities markets to fund portions of the loan portfolio, banks can allocate capital more efficiently, access diverse and cost- effective funding sources, and better manage business risks. But securitization markets offer challenges as well as opportunity. Indeed, the successes of nonbank securitizers are forcing banks to adopt some of their practices. Competition from commercial paper underwriters and captive finance companies has taken a toll on banks’ market share and profitability in the prime credit and consumer loan businesses. -
The Interest Rate Parity (IRP) Is a Theory Regarding the Relationship
What is the Interest Rate Parity (IRP)? The interest rate parity (IRP) is a theory regarding the relationship between the spot exchange rate and the expected spot rate or forward exchange rate of two currencies, based on interest rates. The theory holds that the forward exchange rate should be equal to the spot currency exchange rate times the interest rate of the home country, divided by the interest rate of the foreign country. Uncovered Interest Rate Parity vs Covered Interest Rate Parity The uncovered and covered interest rate parities are very similar. The difference is that the uncovered IRP refers to the state in which no-arbitrage is satisfied without the use of a forward contract. In the uncovered IRP, the expected exchange rate adjusts so that IRP holds. This concept is a part of the expected spot exchange rate determination. The covered interest rate parity refers to the state in which no-arbitrage is satisfied with the use of a forward contract. In the covered IRP, investors would be indifferent as to whether to invest in their home country interest rate or the foreign country interest rate since the forward exchange rate is holding the currencies in equilibrium. This concept is part of the forward exchange rate determination. What is the Interest Rate Parity (IRP) Equation? The covered and uncovered IRP equations are very similar, with the only difference being the substitution of the forward exchange rate for the expected spot exchange rate. The following shows the equation for the uncovered interest rate parity: The following -
Our Approach to Equity Investing Generation to the Next)
VIEWPOINTS OCTOBER 2015, ISSUE 2 Our Approach to Equity Investing The ongoing debate between active versus passive management (also called “indexing”) in the context of equity investing may never be fully resolved. While the purpose of this Viewpoints is not an attempt to resolve the debate, we will briefly touch on the differences between these two approaches and the reasoning behind our approach to equity investing. At Houston Trust Company, we believe both approaches have merit, and each may be useful in achieving a given client’s needs and overall portfolio objectives. However, for the vast majority of our clients, we believe core holdings of high-quality, individual stocks managed (at reasonable cost) by independent, third party investment professionals offers a greater degree of flexibility, control and transparency, and can deliver competitive returns over long periods of time with lower volatility than passively managed index mutual funds. Indexing and Active Equity Active equity management, in contrast to indexing, Management Defined seeks to exploit perceived market inefficiencies in an attempt to outperform the underlying index, or In theory, passive equity investing entails simply benchmark, over time. The degree of outperformance replicating the holdings in an underlying index by is commonly referred to as a manager’s “alpha” purchasing the same securities in the same weights (i.e. the value-added return in excess of the appropriate as the index. In practice, however, what the investor benchmark which is attributable to the manager’s actually owns is a financial instrument, the return of skill). In simple terms, long-only active equity which reflects the return of the particular index (S&P managers will attempt to earn positive excess returns 500, EAFE, etc.) that the instrument is designed to by overweighting underpriced securities/industry replicate. -
An Economic Capital Model Integrating Credit and Interest Rate Risk in the Banking Book 1
WORKING PAPER SERIES NO 1041 / APRIL 2009 AN ECONOMIC CAPITAL MODEL INTEGRATING CR EDIT AND INTEREST RATE RISK IN THE BANKING BOOK by Piergiorgio Alessandri and Mathias Drehmann WORKING PAPER SERIES NO 1041 / APRIL 2009 AN ECONOMIC CAPITAL MODEL INTEGRATING CREDIT AND INTEREST RATE RISK IN THE BANKING BOOK 1 by Piergiorgio Alessandri 2 and Mathias Drehmann 3 In 2009 all ECB publications This paper can be downloaded without charge from feature a motif http://www.ecb.europa.eu or from the Social Science Research Network taken from the €200 banknote. electronic library at http://ssrn.com/abstract_id=1365119. 1 The views and analysis expressed in this paper are those of the author and do not necessarily reflect those of the Bank of England or the Bank for International Settlements. We would like to thank Claus Puhr for coding support. We would also like to thank Matt Pritzker and anonymous referees for very helpful comments. We also benefited from the discussant and participants at the conference on the Interaction of Market and Credit Risk jointly hosted by the Basel Committee, the Bundesbank and the Journal of Banking and Finance. 2 Bank of England, Threadneedle Street, London, EC2R 8AH, UK; e-mail: [email protected] 3 Corresponding author: Bank for International Settlements, Centralbahnplatz 2, CH-4002 Basel, Switzerland; e-mail: [email protected] © European Central Bank, 2009 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main, Germany Telephone +49 69 1344 0 Website http://www.ecb.europa.eu Fax +49 69 1344 6000 All rights reserved. -
Manulife Asset Allocation Client Brochure
Manulife Asset Allocation Portfolios Sophisticated Investment Solutions Made Simple 1 Getting The Big Decisions Right You want a simple yet Deciding how to invest is one of life’s big decisions – effective way to invest in fact it’s a series of decisions that can have a big and Manulife Asset impact on your financial future. Allocation Portfolios It can be complicated and overwhelming, leaving you feeling uncertain offer a solution that can and anxious. The result? Many investors end up chasing fads, trends and help you get it right. short-term thinking, which can interfere with your ability to achieve long-term financial goals. As an investor, you want to make the most of your investments. You want to feel confident you’re receiving value for your money and reputable, professional advice. Big life decisions “Am I making the right investment choices?” Disappointing returns “Should I change my investing strategy?” Confusion and guesswork “How can I choose the best investment for me?” Manulife Asset Allocation Portfolios are managed by Manulife Investment Management Limited (formerly named Manulife Asset Management Limited). Manulife Asset Allocation Portfolios are available in the InvestmentPlus Series of the Manulife GIF Select, MPIP Segregated Pools and Manulife Segregated Fund Education Saving Plan insurance contracts offered by The Manufacturers Life Insurance Company. 2 Why Invest? The goal is to offset inflation and grow your wealth, while planning for important financial goals. Retirement: Canadian Education Raising a Child Pension Plan (CPP) $66,000 $253,947 $735.21 Current cost of a four-year The average cost of raising a Current average monthly payout for post-secondary education1 child from birth to age 183 new beneficiaries. -
The Wisdom of the Robinhood Crowd
NBER WORKING PAPER SERIES THE WISDOM OF THE ROBINHOOD CROWD Ivo Welch Working Paper 27866 http://www.nber.org/papers/w27866 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 2020, Revised December 2020 The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2020 by Ivo Welch. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. The Wisdom of the Robinhood Crowd Ivo Welch NBER Working Paper No. 27866 September 2020, Revised December 2020 JEL No. D9,G11,G4 ABSTRACT Robinhood (RH) investors collectively increased their holdings in the March 2020 COVID bear market, indicating an absence of panic and margin calls. Their steadfastness was rewarded in the subsequent bull market. Despite unusual interest in some “experience” stocks, their aggregated consensus portfolio (likely mimicking the household-equal-weighted portfolio) primarily tilted towards stocks with high past share volume and dollar-trading volume. These were mostly big stocks. Both their timing and their consensus portfolio performed well from mid-2018 to mid-2020. Ivo Welch Anderson School at UCLA (C519) 110 Westwood Place (951481) Los Angeles, CA 90095-1482 and NBER [email protected] The online retail brokerage company Robinhood (RH) was founded in 2013 based on a business plan to make it easier and cheaper for small investors to participate in the stock and option markets. -
Interest Rate Risk and Market Risk Lr024
INTEREST RATE RISK AND MARKET RISK LR024 Basis of Factors The interest rate risk is the risk of losses due to changes in interest rate levels. The factors chosen represent the surplus necessary to provide for a lack of synchronization of asset and liability cash flows. The impact of interest rate changes will be greatest on those products where the guarantees are most in favor of the policyholder and where the policyholder is most likely to be responsive to changes in interest rates. Therefore, risk categories vary by withdrawal provision. Factors for each risk category were developed based on the assumption of well matched asset and liability durations. A loading of 50 percent was then added on to represent the extra risk of less well-matched portfolios. Companies must submit an unqualified actuarial opinion based on asset adequacy testing to be eligible for a credit of one-third of the RBC otherwise needed. Consideration is needed for products with credited rates tied to an index, as the risk of synchronization of asset and liability cash flows is tied not only to changes in interest rates but also to changes in the underlying index. In particular, equity-indexed products have recently grown in popularity with many new product variations evolving. The same C-3 factors are to be applied for equity-indexed products as for their non-indexed counterparts; i.e., based on guaranteed values ignoring those related to the index. In addition, some companies may choose to or be required to calculate part of the RBC on Certain Annuities under a method using cash flow testing techniques. -
An Overview of the Empirical Asset Pricing Approach By
AN OVERVIEW OF THE EMPIRICAL ASSET PRICING APPROACH BY Dr. GBAGU EJIROGHENE EMMANUEL TABLE OF CONTENT Introduction 1 Historical Background of Asset Pricing Theory 2-3 Model and Theory of Asset Pricing 4 Capital Asset Pricing Model (CAPM): 4 Capital Asset Pricing Model Formula 4 Example of Capital Asset Pricing Model Application 5 Capital Asset Pricing Model Assumptions 6 Advantages associated with the use of the Capital Asset Pricing Model 7 Hitches of Capital Pricing Model (CAPM) 8 The Arbitrage Pricing Theory (APT): 9 The Arbitrage Pricing Theory (APT) Formula 10 Example of the Arbitrage Pricing Theory Application 10 Assumptions of the Arbitrage Pricing Theory 11 Advantages associated with the use of the Arbitrage Pricing Theory 12 Hitches associated with the use of the Arbitrage Pricing Theory (APT) 13 Actualization 14 Conclusion 15 Reference 16 INTRODUCTION This paper takes a critical examination of what Asset Pricing is all about. It critically takes an overview of its historical background, the model and Theory-Capital Asset Pricing Model and Arbitrary Pricing Theory as well as those who introduced/propounded them. This paper critically examines how securities are priced, how their returns are calculated and the various approaches in calculating their returns. In this Paper, two approaches of asset Pricing namely Capital Asset Pricing Model (CAPM) as well as the Arbitrage Pricing Theory (APT) are examined looking at their assumptions, advantages, hitches as well as their practical computation using their formulae in their examination as well as their computation. This paper goes a step further to look at the importance Asset Pricing to Accountants, Financial Managers and other (the individual investor). -
Division of Investment Management No-Action Letter: Lazard Freres
FEB 2 1996 Our Ref. No. 95-399 RESPONSE OF THE OFFICE OF CHIEF Lazard Freres Asset COUNSEL DIVISION OF INVESTMENT Management MAAGEMENT File No.80l-6568 Your letter dated July 20, 1995 requests our assurance that we would not recommend enforcement action to the Commission under the Investment Advisers Act of 1940 ("Advisers Act ") if Lazard Freres Asset Management ("LFAM"), a registered investment adviser, charges a performance fee to BPI Capital Management Corporation (BPI Capital) with respect to the performance of the BPI Global Opportunities Fund (the "Fund"). BPI Capital is an investment counsel and portfolio manager registered under the laws of the Province of Ontario and manages 16 publicly offered mutual funds. The Fund is an open- end fund organized under the laws of the Province of Ontario. The Fund has entered into a management agreement with BPI Capital under which BPI Capital is responsible for management of the Fund's ::civestment portfolio and day- to- day management of the Fund. unics of the Fund are offered to investors in the Provinces of Ontario, Manitoba, Saskatchewan, Alberta and British Columbia pursuant to prospectus exemptions under the laws and regulations of each of these Provinces. Under such prospectus exemptions, miLimum investment amounts are CAD $150,000 for investors in Oncario and Saskatchewan and CAD $97,000 for investors in Mani toba, Alberta and British Columbia. A lower minimum amount of CAD $25,000 is available to investors in British Columbia designated as "sophisticated purchasers." No units of the Fund have been offered to any investors residing in the United States and there is no intention to offer any units of the Fund to U.