University of Groningen Essays on asset allocation and diversification Katzur, Tomasz Marcin IMPORTANT NOTE: You are advised to consult the publisher's version (publisher's PDF) if you wish to cite from it. Please check the document version below. Document Version Publisher's PDF, also known as Version of record Publication date: 2013 Link to publication in University of Groningen/UMCG research database Citation for published version (APA): Katzur, T. M. (2013). Essays on asset allocation and diversification. [Thesis fully internal (DIV), University of Groningen]. University of Groningen, SOM research school. Copyright Other than for strictly personal use, it is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), unless the work is under an open content license (like Creative Commons). 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Download date: 17-03-2023 Essays on Asset Allocation and Diversification TomaszMarcinKatzur Publisher: UniversityofGroningen,Groningen,TheNetherlands Printedby: IpskampDrukkers P.O.Box333 7500AHEnschede TheNetherlands ISBN:978-90-367-6201-4/978-90-367-6200-7 (cid:13)c 2013TomaszM.Katzur Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinare- trievalsystemofanynature,ortransmittedinanyformorbyanymeans,electronic, mechanical,nowknownorhereafterinvented,includingphotocopyingorrecord- ing,withoutpriorwrittenpermissionofthepublisher. Essays on Asset Allocation and Diversification Proefschrift terverkrijgingvanhetdoctoraatinde EconomieenBedrijfskunde aandeRijksuniversiteitGroningen opgezagvande RectorMagnificus,dr.E.Sterken, inhetopenbaarteverdedigenop donderdag13juni2013 om11.00uur door TomaszMarcinKatzur geborenop28februari1983 teBydgoszcz,Polen Promotores: Prof.dr.B.W.Lensink Prof.dr.L.Spierdijk Beoordelingscommissie: Prof.dr.R.H.Koning Prof.dr.R.Wessels Prof.dr.S.Gangopadhyay Acknowledgements Estmodusinrebus,suntcertideniquefines,quosultracitraquenequitconsistererectum. Horace I honestly admit that I have never read a Ph.D. thesis before starting to write my own. Therefore I recall well that, as the first copies of graduating colleagues’ thesesweredeliveredtomypigeon-hole,Iwasbemusedbytheelaborateacknow- ledgementsectionstheycontained.Havingembarkedratherlight-heartedlyonthis voyagebyhastilysendingaresearchproposalfromanantiquatedPCinaParisian Internet cafe, I was not quite aware that it would require ‘enduring support’ or involve‘profoundgratitude’,tonamejusttworecurrentphrases. SixyearslaterIhaveabetterunderstandingofthesewords.Whilemanyschol- arshavecomeupwithappealingmetaphorsfortheirpursuits,theonethatcomes tomymindactuallyhasamilitarybackground.InhistreatiseOnWarthePrussian general von Clausewitz writes: ‘Der Krieg ist das Gebiet der Ungewißheit: drei Vier- teile derjenigen Dinge, worauf das Handeln im Krieg gebaut wird, liegen im Nebel einer mehroderwenigergroßenUngewißheit.’Ithinksomethingsimilarholdsforwritinga thesis,threequartersbeingasomewhatconservativeestimate.Andevenforthose accustomed to murky lowlands weather, a lengthy trip through the fog may put somestrainonbodyandmind. Letmefirst,then,thankthosewhoweremypilotsthroughthemist.Iamgrate- fultoRobertLensinkforhisgentleguidance,especiallyattimeswhenIhadgone quitefarastrayfromtheroadtosuccessfulcompletion.Robertalsomadesurethat mypreoccupationwithstatisticalmethodsdidnotfullyeclipsetheeconomicinter- pretationoftheirresults. IthankLauraSpierdijkforherthoroughinvolvement,andinparticularforthe effortssheputintothesecondchapterofthisthesis.EachtimeIleftheroffice,Ifelt Ihadnotonlylearnedsomethingabouteconomicmodelling,butalsohadgained confidenceastomyideasandtheenthusiasmrequiredtocarrythemout. I am also very much indebted to the members of the reading committee for ii studying the manuscript. I received many comments valuable both from the per- spective of conceptual clarification and general readability. I would also like to thank-withoutimplicating-JanJacobs,SiepKroonenbergandSaschadeHaanfor their help in improving the layout of this thesis. For the latter purpose, the thesis packagecreatedbyWardRompwasalsoveryhelpful. To compensate for the somewhat greyish landscapes sketched above, I must saythatIwasfortunatetosharemyuniversityofficewithbrightandcolourfulin- dividuals.AlreadyinthefirstweektogetherwithRientsGalema,somecolleagues camebytojokinglycomplainabouttheloudburstsoflaughteremanatingfromour office.Wemanagedtokeepthisspiritup,fuellingitbyoccasional,yetnotunevent- ful, dashes into the Groningen nightlife. I also very much enjoyed the company of Jacob Bosma, especially his enthusiasm for sharing research ideas and discuss- ingphilosophicalissues.Thesediscussionswouldtypicallyreachtheirzenithonly afterBernardBoonstrajoinedin,whichisherebydulynoted. The regular three ‘o clock meetings at the coffee machine, with Lammertjan Dam, Peter Dijkstra, Remco van Eijkel, Pim Heijnen, Allard van der Made, Aljar Meesters,BastiaanOvervestandEelcoZandbergwerenotonlyapleasantdistrac- tion, but a valuable opportunity to learn first-hand about the vicissitudes of aca- demicresearch. Although the University of Groningen provided me with spacious offices all along, a substantial part of this thesis has been written in a small annex at my parents’ home, counting less than five square metres. It was in this refuge that I couldworkincompletetranquillity.OnceIobtainmycovetedVINEXhouse,Iwill ensuretoconstructoneontopofit. WhilemyPh.D.journeywasquitedemandingintermsoftime,I’mgladthatI wasabletoreservesomeofittojoinanumberofother,moreepic,tripsoverthelast coupleofyears.Diederik,Kris,Jamie,JasperenVincent,here’stoanotherdecade of‘pilgrimages’! IamalsothankfultoKarinforbeingaveryunderstandinghousemate,evenif ourhousingconditionswereinitiallysuboptimal.SincerethanksgoouttoWybren andRoman,forbeinggreatfriendsIcanalwaysrelyon. To those I love most I would just like to say, wishing, in the end, to avoid the superfluous ‘profound gratitude’ and ‘enduring support’, that I realize this thesis tookitstoll.Ipromisenottowriteanyagain. TomaszKatzur Contents 1 Introduction 1 2 Stockreturnsandinflationrisk:economicversusstatisticalevidence 15 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.2 Assetallocationframework . . . . . . . . . . . . . . . . . . . . . . . . 17 2.2.1 Notation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.2.2 Investmentproblem . . . . . . . . . . . . . . . . . . . . . . . . 18 2.2.3 Modelforstockreturnandinflationdynamics . . . . . . . . . 19 2.2.4 Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.2.5 Inflationriskexposureofstocks . . . . . . . . . . . . . . . . . 22 2.3 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.3.1 Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.3.2 Expandingwindow . . . . . . . . . . . . . . . . . . . . . . . . 24 2.3.3 Timingofexpectedinflationandstockreturns . . . . . . . . . 24 2.3.4 Samplestatistics . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.4 Empiricalresults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2.4.1 Posteriordistributions . . . . . . . . . . . . . . . . . . . . . . . 27 2.4.2 Optimalstockallocations . . . . . . . . . . . . . . . . . . . . . 30 2.4.3 Horizoneffects . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.4.4 Inflationriskexposureofstocks . . . . . . . . . . . . . . . . . 34 2.4.5 Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.A Bayesianestimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.B Meanreversionduetopredictability . . . . . . . . . . . . . . . . . . . 37 2.C Realyielddata . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 iv Contents 3 Whoshouldbuylong-termbonds?ThecaseofIndia 39 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 3.2 Institutionalcontext . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.2.1 Governmentbondmarket . . . . . . . . . . . . . . . . . . . . . 41 3.2.2 Assetmanagementindustry. . . . . . . . . . . . . . . . . . . . 43 3.3 Modellingthegovernmentbondmarket . . . . . . . . . . . . . . . . . 44 3.3.1 Choiceofeconometricmodel . . . . . . . . . . . . . . . . . . . 44 3.3.2 Nominalbondprices . . . . . . . . . . . . . . . . . . . . . . . . 46 3.3.3 Nominalbonddemand . . . . . . . . . . . . . . . . . . . . . . 48 3.4 Empiricalanalysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 3.4.1 Dataandsummarystatistics . . . . . . . . . . . . . . . . . . . 51 3.4.2 Risk-averseinvestors:thetrade-offbetweeninterestraterisk andinflationrisk . . . . . . . . . . . . . . . . . . . . . . . . . . 54 3.4.3 Speculative investors: earning the term premium and diver- sifyingequityholdings. . . . . . . . . . . . . . . . . . . . . . . 58 3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 4 Internationaldiversificationbenefitsindevelopingeconomies 63 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 4.2 Themodel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 4.2.1 Assets,returndynamicsandportfolioproblem. . . . . . . . . 66 4.2.2 Solutionmethod . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.2.3 Measuringthegainsfrominvestingabroad . . . . . . . . . . . 69 4.3 Empiricalanalysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 4.3.1 Dataandsummarystatistics . . . . . . . . . . . . . . . . . . . 70 4.3.2 VARestimationresults . . . . . . . . . . . . . . . . . . . . . . . 73 4.3.3 Termstructureofrisk . . . . . . . . . . . . . . . . . . . . . . . 80 4.3.4 Allocationtoforeignassetsanddiversificationbenefits . . . . 83 4.3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 4.A Estimationmethod . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 4.B Datasourcesanddataconstruction . . . . . . . . . . . . . . . . . . . . 91 5 Inflation,stockmarketcrashesandassetallocationinthePhilippines 93 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 5.2 FinancialmarketsinthePhilippines . . . . . . . . . . . . . . . . . . . 95 5.2.1 Interestratesandinflation . . . . . . . . . . . . . . . . . . . . . 95 5.2.2 Stockmarket . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Contents v 5.3 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 5.4 Empiricalanalysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 5.4.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 5.4.2 Modelselection . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 5.4.3 Estimationresults. . . . . . . . . . . . . . . . . . . . . . . . . . 103 5.4.4 Implicationsforassetallocation . . . . . . . . . . . . . . . . . 107 5.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 5.A Modelselection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 6 Efficientjointliabilitycontractsandguarantorcontractsinmicrofinance 117 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 6.2 Themodel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 6.2.1 Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 6.2.2 Loantypes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 6.2.3 Thefirst-bestbenchmark . . . . . . . . . . . . . . . . . . . . . 120 6.3 Symmetriccontracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 6.3.1 Reviewoftheanalysisforindependentprojects . . . . . . . . 121 6.3.2 Introducingprojectcorrelation . . . . . . . . . . . . . . . . . . 125 6.3.3 Thefullinformationbenchmarkwithcorrelatedprojects . . . 126 6.4 Guarantorcontracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 6.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 6.A Derivationofequation6.6 . . . . . . . . . . . . . . . . . . . . . . . . . 137 7 Conclusion 139 References 144 Samenvatting(SummaryinDutch) 155