ARTICLE | doi:10.20944/preprints202205.0169.v1
Subject: Social Sciences, Finance Keywords: asset allocation; risk factor; risk exposure; macro-factor
Online: 12 May 2022 (10:44:13 CEST)
Since financial institutions faced to fatal scenario like subprime mortgage crisis and COVID-19, the factor-based asset allocation methodology is noticed. Asset-only approach which make to consider restrictive risk volatility as individual assets had limitation of macro factor risk. For instance, an institution which allocated assets by asset-only approach cannot deal with the inflation crisis. We review the problem of the traditional modern portfolio approach that is used by Korean financial institutions. For reasonable investment of institution, we notice improved factor-based allocation approach. The first result of this paper is that Mean-variance approach as considered only return of asset recorded lower performance than multi factor-based portfolio in macro factor crisis. Second, we notice allocation model which can minimize probability passing the liability risk exposed macro factors to investment risk exposed macro factors. There are three steps in multi-macro factor-based asset allocation approach: discovering macro factors and mapping asset classes to individual macro factor. Second, define liability account and mapping as considering income and pay out of institution. Third, minimize correlation of fac-tor-based asset risk with liability volatility. Furthermore, using covariance return of assets to allocate makes Pareto improvement and supports to break Home-bias problems.
Subject: Social Sciences, Accounting Keywords: Climate change risk; carbon dioxide; asset pricing modeling
Online: 12 July 2021 (12:01:49 CEST)
In this study, I extend the Fama and French five-factor asset pricing model with a sixth factor, namely, carbon risk, to investigate its impact on equity returns. To measure carbon risk, a new factor ‘pollutant minus green,’ is developed using the difference between the weighted average returns of pollutant and green firms across 51 developed and emerging countries across four categories—North America, Europe, Emerging Markets, and the Asia Pacific. The results reveal that North America, Europe, and Asia Pacific markets have a carbon risk premium that gets eliminated in small-cap firms. The carbon risk factor is further tested in left-hand side (LHS) test asset portfolios and found to be more pronounced with size-effect anomaly; specifically, small stock firms report greater declining average returns because of more exposure than the mega-cap stocks to carbon dioxide emissions. Furthermore, size-effect anomaly prevails with profitability and investment factors across firms. Therefore, high profitability, as well as high investment small firms, show a greater decline than the big stock firms in average returns when their carbon dioxide emissions increase. The asset pricing model evaluation is carried out through the Gibbons, Ross, and Shanken test. The six-factor model directed at capturing carbon risk patterns in average equity returns performs better than the three-factor and five-factor models of Fama and French (1993 and 2015) in the majority of categories under 3x3 sorting and compete with both Fama and French model under 2x4x4 sorted LHS portfolios. The finding of this study offers various useful applications for investors, policymakers, brokers, corporations, governmental pollution abatement institutions, and other stakeholders who wish to obtain carbon risk premium.
ARTICLE | doi:10.20944/preprints202208.0284.v2
Subject: Mathematics & Computer Science, Applied Mathematics Keywords: Safe price; multi asset options; Bermudan options; incomplete markets
Online: 8 September 2022 (09:18:40 CEST)
In this note we describe a new approach to the option pricing problem by introducing the notion of the safe (and acceptable) for the writer price of an option, in contrast to the fair price used in the Black-Scholes model. Our starting point is that the option pricing problem is closely related with the hedging problem by practical techniques. Recalling that the Black - Scholes model does not give us the price of the option but the initial value of a replicating portfolio we observe easily that has a serious disadvantage because assumes the building of this replicating portfolio continuously in time and this is a disadvantage of any model that assumes such a construction. Here we study the problem from the practical point of view concerning mainly the over the counter market. This approach is not affected by the number of the underlying assets and is particularly useful for incomplete markets. In the usual Black-Scholes or binomial or some other approaches one assumes that one can invest or borrow at the same risk free rate $r>0$ which is not true in general. Even if this is the case one can immediately observes that this risk free rate is not a universal constant but is different among different people or institutions. So, the fair price of an option is not so much fair! Moreover, the two sides are not, in general, equivalent against the risk therefore the notion of a fair price has no meaning at all. We also define a variant of the usual binomial model, by estimating safe upward and downward rates $u,d$, trying to give a cheaper safe or acceptable price for the option.
ARTICLE | doi:10.20944/preprints201801.0182.v1
Subject: Mathematics & Computer Science, Probability And Statistics Keywords: financial ruin, withdrawal strategy, asset allocation, rebalancing method, portfolio
Online: 19 January 2018 (09:42:46 CET)
An optimal withdrawal strategy beginning at age 65 provides a lifetime income from a portfolio, adjusted annually for inflation, while reducing the probability of living in financial ruin to an ac-ceptable level. This paper analyzes the probability of living in financial ruin, potentially for multiple years, rather than just the event of ruin. A stochastic Excel model was developed to simulate the effect of varying investment returns on a portfolio with two asset classes; large company stocks and long-term government bonds. A stochastic model is also applied to retiree mortality. The following variables were analyzed to determine their relative impact on withdrawal strategies: • Withdrawing a constant percentage of the portfolio, • Gender, • Initial asset allocation, • Asset allocation rebalancing methods, and • Low investment return environments. For both genders and most withdrawal rates, an approximately equal initial asset allocation of stocks and bonds, combined with a level rebalancing function, provided the lowest probability of living in financial ruin. Because each investment return followed its own probability distribution function, some retirees experienced financial ruin even in the most conservative simulations.
ARTICLE | doi:10.20944/preprints201712.0117.v1
Subject: Social Sciences, Finance Keywords: stable value; defined contribution; optimal asset allocation; stochastic dominance
Online: 18 December 2017 (09:22:13 CET)
Little in the scholarly economics literature is directed specifically to the performance of stable value funds, although they occupy a leading place among retirement investment vehicles. They are currently offered in more than one-third of all defined contribution plans in the USA, with more than $800 billion of assets under management. This paper rigorously examines their performance throughout the entire period since their inception in 1973. We produce a composite index of stable value returns. We next conduct mean-variance analysis, Sharpe and Sortino ratio analysis, stochastic dominance analysis, and optimal multi-period portfolio composition analysis. Our evidence suggests that stable value funds dominate (on average) two major asset classes based on a historical analysis, and that they often occupy a significant position in optimized portfolios across a broad range of risk aversion levels. We discuss factors that contributed to stable value funds’ past performance and whether they can continue to perform well into the future. We also discuss considerations regarding whether or not to include stable value as an element in target date funds within defined contribution pension plans.
ARTICLE | doi:10.20944/preprints202111.0019.v1
Subject: Engineering, Industrial & Manufacturing Engineering Keywords: Industry 4.0; Database; Data models; Big Data & Analytics; Asset Administration Shell
Online: 1 November 2021 (13:01:51 CET)
The data-oriented paradigm has proven to be fundamental for the technological transformation process that characterizes Industry 4.0 (I4.0) so that Big Data & Analytics is considered a technological pillar of this process. The literature reports a series of system architecture proposals that seek to implement the so-called Smart Factory, which is primarily data-driven. Many of these proposals treat data storage solutions as mere entities that support the architecture's functionalities. However, choosing which logical data model to use can significantly affect the performance of the architecture. This work identifies the advantages and disadvantages of relational (SQL) and non-relational (NoSQL) data models for I4.0, taking into account the nature of the data in this process. The characterization of data in the context of I4.0 is based on the five dimensions of Big Data and a standardized format for representing information of assets in the virtual world, the Asset Administration Shell. This work allows identifying appropriate transactional properties and logical data models according to the volume, variety, velocity, veracity, and value of the data. In this way, it is possible to describe the suitability of SQL and NoSQL databases for different scenarios within I4.0.
ARTICLE | doi:10.20944/preprints202211.0295.v1
Subject: Engineering, Civil Engineering Keywords: Data integration; Decision Support System; Information Systems; Infrastructure Asset Management; Water supply systems
Online: 16 November 2022 (03:31:31 CET)
This paper presents a new information technology platform specially tailored for infrastructure asset management of urban water systems operated by water utilities of lower digital maturity level, developed in the scope of DECIdE research project. This platform aims at the integration of different data from the water utilities with several information systems and the assessment of the system performance, in terms of water losses, energy efficiency and quality of service by using developed tools (i.e., water and energy balances and key performance indicators). This platform was tested with data from five small to medium size Portuguese water utilities with different maturity levels in terms of technological and human resources. Obtained results are very promising since the platform allows to assess the systems performance periodically which constitute an important part of the infrastructure asset management for small and medium-sized water utilities
ARTICLE | doi:10.20944/preprints202003.0074.v1
Subject: Social Sciences, Economics Keywords: shareholder value; return-on-asset; days-sales-outstanding; current ratio; supply chain capability
Online: 5 March 2020 (02:35:22 CET)
The purpose of this paper is to explore which financial performance indicators (FPIs) evaluate the level of supply chain capability (SCC) that explicitly touches all of the business functions and processes within and beyond the company. The authors investigated nine FPIs that were selected from the financial statements of 155 companies within nine industries. The authors find that suitable FPIs to measure SCC for shareholders’ value are return-on-assets (ROA), days-sales-outstanding (DSO), and current ratio (CR). This means that higher ROA, shortened DSO, and an appropriate level of CR could reach a sustainable supply chain. These results will help the industry to avert a major disruption in supply chain processes and activities using suitable financial performance indicators.
ARTICLE | doi:10.20944/preprints201910.0038.v1
Subject: Social Sciences, Finance Keywords: asset pricing; credit risk modeling; unilateral; bilateral; multilateral credit risk; collateralization; comvariance; comrelation; correlation
Online: 3 October 2019 (04:49:57 CEST)
This article presents a comprehensive framework for valuing financial instruments subject to credit risk. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats in financial markets. We analyze how swap rates are affected by bilateral counterparty credit risk, and how CDS spreads depend on the trilateral credit risk of the buyer, seller, and reference entity in a contract. Moreover, we study the effect of collateralization on valuation, since the majority of OTC derivatives are collateralized. The model shows that a fully collateralized swap is risk-free, whereas a fully collateralized CDS is not equivalent to a risk-free one.
ARTICLE | doi:10.20944/preprints201710.0105.v1
Subject: Social Sciences, Business And Administrative Sciences Keywords: chief executive officer; compensation; firm performance; Nigeria banking industry; chief executive officer compensation; firm size; return on asset
Online: 16 October 2017 (07:56:04 CEST)
This is a quantitative research based on secondary sources of data. The study examines the influence of Chief Executive Officer’s (CEO) compensation on a firm's performance. The objectives of the study were to determine if CEO compensation and firm size do significantly influence a firm’s performance. In other to elicit information to examine the relationship between the variables, the convenience sampling technique, with the combination of both the cross-sectional and time-series data (panel data) were used since they provide greater precision and guard against having an illusory sample. 10 banks quoted on the Nigerian Stock Exchange were sampled for easy accessibility of data. The least square regression technique was used to test the hypotheses of the study. Two hypotheses were tested using panel least square (EViews 8) and from the research work, we summarize the following results; there is a significant relationship between CEO compensation and firm performance in the Nigerian banking industry. In addition, firm size does significantly influence firm performance in the Nigerian banking industry. The study recommends that there should be proper compensation review as this will increase the productivity of the executives. Since increased pay is necessary for the efficiency of the workers, it is advised to ensure a considerable pay as this will ensure for efficiency in the organization. In addition, since the core goal of setting up any business is to make a profit, business organisations should sort out ways at maximising profit and this could include cutting down expenses such as cutting down excessive employees’ pay (CEOs pay especially) and setting apposite pay package for employees. Therefore, policymakers (board of directors) should make an effort to align CEO’s paywith the firm’s capability to pay.
ARTICLE | doi:10.20944/preprints201909.0230.v1
Subject: Social Sciences, Finance Keywords: unilateral/bilateral collateralization; partial/full/over collateralization; asset pricing; plumbing of the financial system; swap premium spread; OTC/cleared/listed financial markets
Online: 20 September 2019 (04:06:14 CEST)
This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of financial contracts. We also analyze the difference between cleared and OTC markets.
ARTICLE | doi:10.20944/preprints202111.0083.v2
Subject: Engineering, Control & Systems Engineering Keywords: RAMI4.0; Asset Administration Shell (AAS); Multi-Agent Systems (MAS); Evolutionary Assembly Systems (EAS); Engineering Capabilities Based, Production Flow Scheme (PFS); Petri Net (PN).
Online: 18 November 2021 (14:26:42 CET)
Manufacturing systems need to meet I4.0 guidelines to deal with uncertainty in scenarios of turbulent demand for products. The engineering concepts to define the service’s resources to manufacture the products will be more flexible, ensuring the possibility of re-planning in operation. These can follow the engineering paradigm based on capabilities. The virtualization of industry components and assets achieves the RAMI 4.0 guidelines and (I4.0C), which describes the Asset Administration Shell (AAS). However, AAS are passive components that provide information about I4.0 assets. The proposal of specific paradigms is exposed for managing these components, as is the case of multi-agent systems (MAS) that attribute intelligence to objects. The implementation of resource coalitions with evolutionary architectures (EAS) applies cooperation and capabilities’ association. Therefore, this work focuses on designing a method for modeling the asset administration shell (AAS) as virtual elements orchestrating intelligent agents (MAS) that attribute cooperation and negotiation through contracts to coalitions based on the engineering capabilities concept. The systematic method suggested in this work is partitioned for the composition of objects, AAS elements, and activities that guarantee the relationship between entities. Finally, Production Flow Schema (PFS) refinements are applied to generate the final Petri net models (PN) and validate them with Snoopy simulations. The results achieved demonstrate the validation of the procedure, eliminating interlocking and enabling liveliness to integrate elements behavior.