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US investors hold much less foreign stocks than mean/variance analysis applied to historical data predicts. In this article, we investigate whether this home bias can be explained by Bayesian approaches to international asset allocation. In contrast to mean/variance analysis, Bayesian approaches employ different techniques for obtaining the set of expected returns. They shrink sample means towards a reference point that is inferred from economic theory. We also show that one of the Bayesian approaches leads to the same implications for asset allocation as mean-variance/tracking error criterion. In both cases, the optimal portfolio is a combination the market portfolio and the mean/variance efficient portfolio with the highest Sharpe ratio.
Applying the Bayesian approaches to the subject of international diversification, we find that substantial home bias can be explained when a US investor has a strong belief in the global mean/variance efficiency of the US market portfolio and when he has a high regret aversion falling behind the US market portfolio. We also find that the current level of home bias can justified whenever regret aversion is significantly higher than risk aversion.
Finally, we compare the Bayesian approaches to mean/variance analysis in an empirical out-ofsample study. The Bayesian approaches prove to be superior to mean/variance optimized portfolios in terms of higher risk-adjusted performance and lower turnover. However, they not systematically outperform the US market portfolio or the minimum-variance portfolio.
We analyze exchange rates along with equity quotes for 3 German firms from New York (NYSE) and Frankfurt (XETRA) during overlapping trading hours to see where price discovery occurs and how stock prices adjust to an exchange rate shock. Findings include: (a) the exchange rate is exogenous with respect to the stock prices; (b) exchange rate innovations are more important in understanding the evolution of NYSE prices than XETRA prices; and (c) most (but not all) of the fundamental or random walk component of firm value is determined in Frankfurt.
In contrast to the United States and the United Kingdom, little empirical work exists about the distributional characteristics of appraisalbased real estate returns outside these countries. The purpose of this study is to fill this gap by focusing on Germany. In line with other studies, this paper offers an extensive investigation into the distribution of German real estate returns and compares them with and U.S. and U.K. data in the same period. Furthermore, the comovements with bonds and stocks are also examined. In the core, the distributional characteristics for German real estate are comparable to that for the U.S. and U.K.
U.S. investors hold much less international stock than is optimal according to mean–variance portfolio theory applied to historical data. We investigated whether this home bias can be explained by Bayesian approaches to international asset allocation. In comparison with mean–variance analysis, Bayesian approaches use different techniques for obtaining the set of expected returns by shrinking the sample means toward a reference point that is inferred from economic theory. Applying the Bayesian approaches to the field of international diversification, we found that a substantial home bias can be explained when a U.S. investor has a strong belief in the global mean–variance efficiency of the U.S. market portfolio, and in this article, we show how to quantify the strength of this belief. We also found that one of the Bayesian approaches leads to the same implications for asset allocation as the mean–variance/tracking-error criterion. In both cases, the optimal portfolio is a combination of the U.S. market portfolio and the mean–variance-efficient portfolio with the highest Sharpe ratio.
For the Neuer Markt year 2001 is not considered as one of its best, compared to its prior performance. Investors who once piled into the Neuer Markt have now become wary of the exchange, which was launched in 1997 as Europe’s leading growth market and answer to the U.S.‘s Nasdaq Stock Market. The Neuer Markt’s reputation has been marred by the misleading information policy from several Neuer Markt companies, publishing false annual and quarterly data. Some of these companies are responsible for having misinformed investors of their pending bankruptcies. Under these circumstances, it is time to find an explanation for the dramatic loss of credibility in Neuer Markt enterprises. Finding an answer, two aspects come under consideration: • What type of information (annual versus quarterly reports) was available for investors and • of what quality were these provided data. Interim reports can be seen as important instrument in the reporting system to inform all kinds of investors. For this reason we examine the quality of Neuer Markt quarterly reports by concentrating on the disclosure level of 52 Neuer Markt companies‘ reports for the third quarter 1999 and 2000. To enable comparison we establish four disclosure indexes that measure the report’s compliance with the Neuer Markt Rules and Regulations as well as with IAS and US GAAP interim reporting standards. The results demonstrate that the level of disclosure has increased over time. Then we aim to find typical attributes of Neuer Markt enterprises that provide high or low level of accounting information in their quarterly reports. Nevertheless the study also shows that there is not any correlation between market capitalization and the quality of interim reports. However, it can be suggested that an additional enforcement mechanism could improve quality and lure investors back. A step towards this aim is the standardization project of quarterly reports of Deutsche Boerse AG.
Open source projects produce goods or standards that do not allow for the appropriation of private returns by those who contribute to their production. In this paper we analyze why programmers will nevertheless invest their time and effort to code open source software. We argue that the particular way in which open source projects are managed and especially how contributions are attributed to individual agents, allows the best programmers to create a signal that more mediocre programmers cannot achieve. Through setting themselves apart they can turn this signal into monetary rewards that correspond to their superior capabilities. With this incentive they will forgo the immediate rewards they could earn in software companies producing proprietary software by restricting the access to the source code of their product. Whenever institutional arrangements are in place that enable the acquisition of such a signal and the subsequent substitution into monetary rewards, the contribution to open source projects and the resulting public good is a feasible outcome that can be explained by standard economic theory.
Open source projects produce goods or standards that do not allow for the appropriation of private returns by those who contribute to their production. In this paper we analyze why programmers will nevertheless invest their time and effort to code open source software. We argue that the particular way in which open source projects are managed and especially how contributions are attributed to individual agents, allows the best programmers to create a signal that more mediocre programmers cannot achieve. Through setting themselves apart they can turn this signal into monetary rewards that correspond to their superior capabilities. With this incentive they will forgo the immediate rewards they could earn in software companies producing proprietary software by restricting the access to the source code of their product. Whenever institutional arrangements are in place that enable the acquisition of such a signal and the subsequent substitution into monetary rewards, the contribution to open source projects and the resulting public good is a feasible outcome that can be explained by standard economic theory.
What constitutes a financial system in general and the German financial system in particular?
(2003)
This paper is one of the two introductory chapters of the book "The German Financial System". It first discusses two issues that have a general bearing on the entire book, and then provides a broad overview of the German financial system. The first general issue is that of clarifying what we mean by the key term "financial system" and, based on this definition, of showing why the financial system of a country is important and what it might be important for. Obviously, a definition of its subject matter and an explanation of its importance are required at the outset of any book. As we will explain in Section II, we use the term "financial system" in a broad sense which sets it clearly apart from the narrower concept of the "financial sector". The second general issue is that of how financial systems are described and analysed. Obviously, the definition of the object of analysis and the method by which the object is to be analysed are closely related to one another. The remainder of the paper provides a general overview of the German financial system. In addition, it is intended to provide a first indication of how the elements of the German financial system are related to each other, and thus to support our claim from Section II that there is indeed some merit in emphasising the systemic features of financial systems in general and of the German financial system in particular. The chapter concludes by briefly comparing the general characteristics of the German financial system with those of the financial systems of other advanced industrial countries, and taking a brief look at recent developments which might undermine the "systemic" character of the German financial system.
Portfolio choice and estimation risk : a comparison of Bayesian approaches to resampled efficiency
(2002)
Estimation risk is known to have a huge impact on mean/variance (MV) optimized portfolios, which is one of the primary reasons to make standard Markowitz optimization unfeasible in practice. Several approaches to incorporate estimation risk into portfolio selection are suggested in the earlier literature. These papers regularly discuss heuristic approaches (e.g., placing restrictions on portfolio weights) and Bayesian estimators. Among the Bayesian class of estimators, we will focus in this paper on the Bayes/Stein estimator developed by Jorion (1985, 1986), which is probably the most popular estimator. We will show that optimal portfolios based on the Bayes/Stein estimator correspond to portfolios on the original mean-variance efficient frontier with a higher risk aversion. We quantify this increase in risk aversion. Furthermore, we review a relatively new approach introduced by Michaud (1998), resampling efficiency. Michaud argues that the limitations of MV efficiency in practice generally derive from a lack of statistical understanding of MV optimization. He advocates a statistical view of MV optimization that leads to new procedures that can reduce estimation risk. Resampling efficiency has been contrasted to standard Markowitz portfolios until now, but not to other approaches which explicitly incorporate estimation risk. This paper attempts to fill this gap. Optimal portfolios based on the Bayes/Stein estimator and resampling efficiency are compared in an empirical out-of-sample study in terms of their Sharpe ratio and in terms of stochastic dominance.
Eine Beteiligung des Managements an Gewinngrößen spielt eine wichtige Rolle bei der Ausrichtung von Managemententscheidungen auf die Ziele der Unternehmenseigentümer. Dieser Beitrag zeigt auf, unter welchen Gewinnermittlungsregeln ein Agent zu optimalen Investitionsentscheidungen motiviert wird, wenn er an den Residualgewinnen beteiligt wird. Dieser Beitrag beschäftigt sich insbesondere mit der Frage, ob zum Zwecke einer optimalen Investitionssteuerung, Fertigerzeugnisse zu Vollkosten oder zu Teilkosten bewertet werden sollen. Vor diesem Hintergrund werden ebenfalls verschiedene Wertansätze für Forderungen auf ihre Anreizwirkungen untersucht.