Alarm bells have been ringing over the summer about remarkably low levels of volatility — a key input in many common investment models — across global markets.
Despite numerous studies attempting to link volatility to changing fundamentals, research shows that investor emotions are the root cause of the vast majority of these price changes, according to C. Thomas Howard.
As modern portfolio theory fades in reputation from intense pressure from behavioral finance, many researchers are seeking to fill the void with behavioral finance applications. Behavioral portfolio management is one such model.
If the global financial crisis has left us with any enduring lessons, it's that asset return distributions can be significantly skewed and asymmetrical with fat-tails. So how can investment practitioners manage this new reality? That question animated a recent presentation by Dr. Peng Chen, CEO Asia (ex-Japan) of Dimensional Fund Advisors, at the CFA Institute Thailand Investment Conference, which was co-sponsored with CFA Society Thailand and the country's Securities Exchange Commission.
Broadcast live from the Thailand Investment Conference, Peng Chen, CFA, chief executive officer of Asia (ex-Japan) at Dimensional Fund Advisors, will discuss "Asset Allocation in a Non-Normal World."
Helping a client understand and articulate their own goals and their biggest fears, and then building a compatible investment strategy, is an enormous challenge and is likely to be different with every client.
Amidst the worst financial crisis in a generation, polarizations between proponents of quantitative approaches and those who favor classical fundamental analysis and behavioral finance pose a hindrance to solving the practical challenges we face as investors. Can this chasm be bridged?
In August 2007, the head of AIG’s financial products division stated, “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar” in any credit default swap (CDS) transactions. Five months later, AIG disclosed that it had lost not $1.00 but $5 billion on its CDS exposure. This turn of events is just one example of sophisticated financial institutions’ hugely misjudging the risk of “financial weapons of mass destruction.” The reasons for their systematic failure deserve thoughtful and rigorous study.
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