Publication Date

2016

Document Type

Dissertation/Thesis

First Advisor

Cheng, Airu

Degree Name

Ph.D. (Doctor of Philosophy)

Department

Department of Economics

LCSH

Portfolio management||Investments||Portfolio management--Mathematical models

Abstract

This dissertation consists of two self-contained essays. The first essay compares out-of-sample performance of asset allocation using forward-looking information and backward-looking information. The existing literature processes forward-looking and backward-looking information using different models and consequently different sets of assumptions. Therefore, one might wonder if superior performance of portfolios using these two sources of information should be attributed to superiority of sources of information or superiority of models underlying them. In contrast, this study uses the identical stochastic volatility model to process both forward-looking and backward-looking information. The empirical results of this study show that the investor will be significantly better off when using the forward-looking information in her asset allocation compared to using the backward-looking information. In the second essay, I investigate the relationship between idiosyncratic risk at industry level and stock prices. The Capital Asset Pricing Model (CAPM) predicts that idiosyncratic risk would not be priced by investors, since investors can avoid it through portfolio diversification. In contrast to CAPM's prediction, the authors of existing literature usually conclude that this type of risk is priced by investors at firm level. I hypothesized that risk at industry level, like risk at firm level, is priced by investors. Surprisingly, I found some evidence that net industry-level volatility innovations are contemporaneously positively correlated to respective industry excess returns in some industries. This positive relation is interpreted as lower prices for industries with higher idiosyncratic risk, in contrast to my assumption.

Comments

Advisors: Airu Cheng; Virginia Wilcox-Gok.||Committee members: Carl Campbell; Khan Mohabbat.||Includes bibliographical references.

Extent

v, 66 pages

Language

eng

Publisher

Northern Illinois University

Rights Statement

In Copyright

Rights Statement 2

NIU theses are protected by copyright. They may be viewed from Huskie Commons for any purpose, but reproduction or distribution in any format is prohibited without the written permission of the authors.

Media Type

Text

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