Working papers 2003
Number 2003/01 - Prof Viv Hall and Angela Huang
"Would adopting the US dollar have led to improved inflation, output and trade balances, for New Zealand in the 1990s?".
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Abstract
Deterministic simulations with the Reserve Bank of New Zealand's core FPS model show how New Zealand's broad macroeconomic environment might have evolved over the 1990s, if a US nominal yield curve and US TWI exchange rate movements under a common currency arrangement had been experienced.
Relatively looser monetary conditions would have prevailed, and led to modest short-run output gains, greater excess demand pressures, noticeably higher CPI inflation rates over the whole of the 1990s, and less favourable trade balance outcomes, especially for the late 1990s.
These macroeconomic outcomes are overall less favourable than those obtained from simulating the equivalent Australian monetary conditions
Number 2003/02 - Prof Roger Bowden
"Ordered mean difference benchmarking, utility generators and capital market equilibrium".
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Abstract
Originally designed as a fund performance measure, the ordered mean difference construction is extended to characterise zero surplus situations such as a capital market equilibrium generated by arbitrary risk preferences. This enables non parametric testing for whether CAPM applies and the detection of pricing inefficiences or anomalies from historical data, including international capital market segmentation.
Any risk averse utility function can be decomposed into a weighted average of elementary put option profile or 'gnomic' utility functions, which collectively generate the OMD areas. The risk profile of the investor can be summarised in terms of a representative gnome, as can the market risk premium. Pricing efficiency turns on whether such a representative gnome exists.
Key words: Benchmarking, CAPM, capital market segmentation, equivalent margin fund performance, generalised distributions, investor surplus, market efficiency, ordered mean difference, risk premium, running mean operator, utility generators.
Number 2003/03 - Prof Roger Bowden
"Portfolio risk profiling via the bootstrap: holding period analysis for small cap versus large cap stocks"
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Abstract
Strategic modes of portfolio management commonly focus on longer period holdings returns, with a number of associated recommendations, amounting to 'riding the risk premium'. The ensuing data problems in examining such a claim can be handled by bootstrapping the available set of returns, which avoids specific distributional assumptions such as long normality. Using ordered mean difference techniques, it is shown that the holding period should be considered in conjunction with risk preferences. Depending upon the latter, small cap stocks can be either beneficial or detrimental relative to a large cap benchmark.
Keywords: Bootstrapping, holding period returns, ordered mean difference, risk profiling, small cap, strategic portfolios.
Number 2003/04 - Prof Roger Bowden
"Utility-Invariant linear Hedges"
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Abstract
As the cost of funding babyboomer retirement under defined benefit schemes has become apparent, the resulting paradigm shift to defined contribution - but undefined rewards - has left pensioners exposed to performance, credit, and time to death risk, looming ever larger as life tables lengthen. It is argued that defined benefit schemes can be designed off the back of high grade debt issuance programmes, that might be used to finance long term public asset vehicles and resolve agency problems in public retirement provision. Derivatives can be used to enhance coupons and to correctly align risk preferences as between income while still alive and bequests. Variable lifetime reinvested coupon options and annuity swaps utilise market pricing to provide unambiguous pricing benchmarks and a necessary underpinning of lifecycle planning certainty. The result is a flexible mix of private and public provision of old age income assurance, that exploits the externalities of a well-designed system of public debt.
Number 2003/05 - Prof Roger Bowden
"Utility spanning and the Ordered Mean Difference Envelope"
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Abstract
It is shown that the space of optimising portfolios for increasing risk averse utility functions forms a one dimensional manifold, which is the envelope of the ordered mean difference utility generators. The manifold also yields the set of second order stochastic dominant portfolios. The optimising portfolio for any utility function can be obtained by solving the simpler problem for a representative utility generator, which has just two linear segments. This can be done by using linear programming, which in turn can be iterated to trace out the entire efficient set, giving a computationally undemanding way of obtaining the stochastic dominance efficient set. The general efficiency frontier shares the one dimensional property with the mean variance efficient frontier, but unlike the latter, the associated portfolios do not form a convex set, so the two fund theorem of mean variance portfolio anaylsis does not hold in general.
Keywords: Efficient frontier, equivalent margin linear programming, ordered mean difference, portfolio analysis, stochastic dominance, utility function, utility generator, utility spanning.
Number 2003/06 - Prof Roger Bowden
"The Zero Capital Approach to Portfolio Enhancement and Overlay Management"
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Abstract
Both active and passive portfolio enhancement can be analysed within a zero capital framework, wherein enhancement exposures are reported as an additional or secondary portfolio requiring zero capital. This enables an identification of the economic value added by the enhancement, using two complementary approaches. The first is based on traditional beta analysis which is useful in identifying the direction and magnitude of exposures. The second is non parametric in nature and plots ordered mean difference schedules for the enhancement against the base portfolio. This enables risk profiling where the manager can match the likely range of his or her own risk preferences again the empirical history of the relationship, so that explicit risk premiums do not have to be utilised. The empirical illustration exhibits asymmetries in the effectiveness of currency overlay.
Keywords: Benchmarking, currency overlay, equivalent margin, international diversification, ordered mean difference, portfolio enhancement, value at risk.