If one believes in a more sustained economic recovery in the near term than the more volatile one... more If one believes in a more sustained economic recovery in the near term than the more volatile one we have been witnessing over the past few years, and hence the inherent risk of accelerating inflation, Treasury inflation-protected securities (TIPS) could provide inflation protection to institutional investors as a diversifier and a hedging instrument. In this paper, we show that TIPS offer excellent diversification benefits to different types of investors. Given the expectations for the economy in coming years, and the diversification benefits that TIPS offer, we recommend that institutional as well as individual investors allocate approximately 20 percent of portfolios to inflation-linked bonds. There are four apparent reasons for this recommendation: (1) low and sometimes negative correlations with major asset classes, (2) expectation for higher probabilities of inflation surprises, (3) robust risk/return profiles of TIPS, and (4) an inherent need to match liabilities that increas...
Endowment fund managers face an asset allocation problem with several particularities: they are m... more Endowment fund managers face an asset allocation problem with several particularities: they are more interested in spending for current and future beneficiaries than growing value, although the trade-off between these two alternatives needs to be understood; they have to consider longest-term investment, typically an infinite horizon. We do address these allocation constraints in a dynamic framework where minimum subsistence levels (introducing the idea that a minimum spending amount needs to be made at every time period) are introduced in the objective function. We derive explicit formulas for the optimal spending stream, endowment value, spending rate and portfolio strategy in a simple Black/Scholes type economy. We analyze the effects of parameter changes on asset allocation decisions and provide simulations on bearish, median and bullish paths.
There is evidence that disappointment is felt in situations where others are responsible for the ... more There is evidence that disappointment is felt in situations where others are responsible for the bad experience (Zeelenberg, van Dijk and Manstead, 1998). Trustees and board members usually feel more responsible by the major decisions made on behalf of the fund, and have the tendency to blame the bad experiences resulting from secondary decisions on the investment consultant. We show that as the hedger becomes more disappointment-averse, a smaller forward position will be held. Institutional investors will be well advised to incorporate this result in currency hedging mandates to minimize the background risk resulting from delegated fund management.
Review of Quantitative Finance and Accounting, 2006
Endowment fund managers face an asset allocation problem with several particularities: they are m... more Endowment fund managers face an asset allocation problem with several particularities: they are more interested in spending for current and future beneficiaries than growing value, although the trade-off between these two alternatives needs to be understood; they have to consider longest-term investment, typically an infinite horizon. We do address these allocation constraints in a dynamic framework where minimum subsistence levels (introducing the idea that a minimum spending amount needs to be made at every time period) are introduced in the objective function. We derive explicit formulas for the optimal spending stream, endowment value, spending rate and portfolio strategy in a simple Black/Scholes type economy. We analyze the effects of parameter changes on asset allocation decisions and provide simulations on bearish, median and bullish paths.
If one believes in a more sustained economic recovery in the near term than the more volatile one... more If one believes in a more sustained economic recovery in the near term than the more volatile one we have been witnessing over the past few years, and hence the inherent risk of accelerating inflation, Treasury inflation-protected securities (TIPS) could provide inflation protection to institutional investors as a diversifier and a hedging instrument. In this paper, we show that TIPS offer excellent diversification benefits to different types of investors. Given the expectations for the economy in coming years, and the diversification benefits that TIPS offer, we recommend that institutional as well as individual investors allocate approximately 20 percent of portfolios to inflation-linked bonds. There are four apparent reasons for this recommendation: (1) low and sometimes negative correlations with major asset classes, (2) expectation for higher probabilities of inflation surprises, (3) robust risk/return profiles of TIPS, and (4) an inherent need to match liabilities that increas...
Endowment fund managers face an asset allocation problem with several particularities: they are m... more Endowment fund managers face an asset allocation problem with several particularities: they are more interested in spending for current and future beneficiaries than growing value, although the trade-off between these two alternatives needs to be understood; they have to consider longest-term investment, typically an infinite horizon. We do address these allocation constraints in a dynamic framework where minimum subsistence levels (introducing the idea that a minimum spending amount needs to be made at every time period) are introduced in the objective function. We derive explicit formulas for the optimal spending stream, endowment value, spending rate and portfolio strategy in a simple Black/Scholes type economy. We analyze the effects of parameter changes on asset allocation decisions and provide simulations on bearish, median and bullish paths.
There is evidence that disappointment is felt in situations where others are responsible for the ... more There is evidence that disappointment is felt in situations where others are responsible for the bad experience (Zeelenberg, van Dijk and Manstead, 1998). Trustees and board members usually feel more responsible by the major decisions made on behalf of the fund, and have the tendency to blame the bad experiences resulting from secondary decisions on the investment consultant. We show that as the hedger becomes more disappointment-averse, a smaller forward position will be held. Institutional investors will be well advised to incorporate this result in currency hedging mandates to minimize the background risk resulting from delegated fund management.
Review of Quantitative Finance and Accounting, 2006
Endowment fund managers face an asset allocation problem with several particularities: they are m... more Endowment fund managers face an asset allocation problem with several particularities: they are more interested in spending for current and future beneficiaries than growing value, although the trade-off between these two alternatives needs to be understood; they have to consider longest-term investment, typically an infinite horizon. We do address these allocation constraints in a dynamic framework where minimum subsistence levels (introducing the idea that a minimum spending amount needs to be made at every time period) are introduced in the objective function. We derive explicit formulas for the optimal spending stream, endowment value, spending rate and portfolio strategy in a simple Black/Scholes type economy. We analyze the effects of parameter changes on asset allocation decisions and provide simulations on bearish, median and bullish paths.
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Papers by Kurtay Ogunc