International Journal of Financial Engineering

This paper proposes six strategies for deciding upon “budget of uncertainty” parameters as input to a sequence of robust (portfolio) optimization problems over time, the solutions of which are a sequence of portfolios (i.e., a portfolio trajectory). Using 10 French Library datasets,¹ the performance of the portfolio trajectories resulting from these strategies are compared with one another and the 1/$n$ strategy. Before accounting for trading costs, all strategies result in portfolio trajectories that produce higher profit than the 1/$n$ strategy. Even after accounting for trading costs (of 1% of trading volume), two of the strategies result in portfolio trajectories that have higher profit and lower risk compared to the 1/$n$ strategy. Furthermore, we find that equal-weighted indices are better assets to manage than value-weighted indices in terms of achieving larger returns and lower risks.

This paper attempts to distinguish the role of banking sector credit to enterprise and household in economic growth of Pakistan for the period from 1982 to 2017. Using Autoregressive Distributed Lag (ARDL) bound technique to cointegration, our results confirm that enterprise credit has a positive and significant impact on the economic growth of Pakistan for the sample period. In contrast, the other component of private credit, i.e., household credit is not a positive driver of economic growth. CUSUM test finds that the parameters of the model with enterprise and household credit are stable. It is recommended therefore that the central bank should modify the credit policy for household sector and support enterprise credit in the context to achieve sustainable economic growth in Pakistan.

In this paper, we consider the regime-switching Heston–CIR model, where the parameters of the volatility process are modulated by a Hidden Markov chain and the unobserved regimes. Then, we calibrate the parameters of the volatility and interest rate processes by the expectation maximization (EM) and maximum likelihood estimation (MLE) algorithms, respectively. Next, we use the least square Monte-Carlo (LSM) algorithm to determine the S&P500 American barrier put option under the Heston–CIR model. Finally, by the binomial tree method as a benchmark, we provide some numerical experiments to illustrate the accuracy of the achieved results.

This study empirically analyzes the three models of CAPM in order to get the best determinants, and superlative model of CAPM in the context of Pakistan’s Financial Sector. This study used fixed Effect model and Hausman test are used in this study to investigate the single-, three- and five-factor CAPM. First we analyzed the single factor CAPM, and results explain 52% variations in the dependent variable — stock returns. Next, the three-factors CAPM is analyzed, which elucidates 69% variations in the dependent variable — stock returns — on the addition of two more factors (size and value). Lastly, five factor CAPM is estimated, which provides 76% variations in the dependent variable — stock returns — by adding two more factors (investment and profitability) in the three factor CAPM. This shows that the addition of more factors in the CAPM bestows suitable results in the financial sector of Pakistan.

Research and development is an emerging competitive advantage to gain maximum market share. This study is conducted to empirically investigate the relationship between research and development intensity and firm performance in selected non-financial firms listed at Pakistan Stock Exchange (PSX). Moreover, the role of ownership structure and board structure have been evaluated between predictor and outcome variable. For this purpose, 27 non-financial firms listed on PSX have been selected for the period of eight years from 2009 to 2016 and unbalanced panel data was obtained. Research and development intensity has been used as an independent variable. ROA, ROE, and TQ are used as measures of financial performance, i.e., dependent variable. Ownership concentration, institutional ownership, and managerial ownership are used as the proxies for ownership structure. Board size, board independence, and board meeting frequency are used as the proxies for board structure. Moreover, firm size, firm age and leverage have also been used as a control variables in data analysis. Based on data analyses, it is concluded that research and development intensity has a positive and significant relationship with all three proxies of firm performance, i.e., ROA, ROE and Tobin’s Q. Afterward, the researchers have investigated the moderating role of ownership structure and board structure between research and development intensity and three proxies of firm performance. It is also concluded that in general ownership structure as well as board structure are negatively moderating the relationship between research and development intensity and firm performance which raises a question mark on the effectiveness of corporate governance mechanism in terms of R&D performance.

We consider a risk averse investor as are who has a bond, is rewarded with $\alpha$ units of company stock option and is endowed with stochastic income. First, we derive and analyzes the optimal investment threshold and investment value function of the investor. Second, we determine a remuneration package and the utility indifference pricing of this risk averse investor and analyze the results for two utility functions; the exponential and logarithmic utilities. From these results, we conclude that the more units of company stock the investor receives, the higher the chances of increasing the total wealth or profit.

In this paper, we extend the classical constant elasticity of variance (CEV) model to a subdiffusive CEV model, where the underlying CEV process is time changed by an inverse $\alpha$-stable subordinator. The new model can capture the subdiffusive characteristics of financial markets. We find the corresponding fractional Fokker–Planck equation governing the PDF of the new process. We also derive the analytical formula for option prices in terms of eigenfunction expansion. This method avoids the evaluation of PDF of an inverse $\alpha$-stable variable and also eliminates the need for numerical integration to calculate the option prices. We numerically investigate the sensitivities of the option prices to the key parameters of the newly developed model.

The objective of this study is to investigate the impact of bank capital on monetary policy transmission mechanism during the period from 2010 to 2016 for 20 Emerging Market Economics (EMEs) by using the two-step system generalized method of moments (GMM). The coefficient of excess capital in low-asset countries is found to be negative which reveals the importance of excess capital for the effectiveness of monetary transmission. However, the study could not find the significance of excess capital for high-asset countries as they may afford the risky way to generate their income by increasing the loan supply.