Title & Abstract

Abstract : We study the optimal consumption and investment decision of a wage earner with stochastic income in the presence of a constraint that imposes minimum consumption-to-income ratio. There exists a threshold of wealth to income ratio that corresponds to the consumption-to-income ratio constraint, and if the wealth-to-income ratio is below the threshold, it is optimal to keep the optimal consumption-to-income ratio as the constrained level, which is higher than the optimal level without constraint. As a compensation, the optimal consumption-to-income ratio when the wealth to income ratio is above the threshold is lower than that without constraint. Regarding the optimal investment, we can show that, depending on the level of risk aversion and the volatility of stochastic income, tighter constraint may lead to more investment, which is consistent with Ahn et al. (2018) that consider debt-to-income ratio constraint. We further consider the case with both consumption-to-income ratio constraint and debt-to-income ratio constraint, and investigate the interplay of two constraints.

Abstract : I discuss the prospect of automatized personalized service for long-term investment and explain three requirements for its achievement. The requirements are (i) a proper model of risk management, (ii) a practically implementable model of the universe of investment vehicles, (iii) appropriate methods to handle transaction costs and taxes. Fist, I propose a risk management model and provide a closed-form solution based on the simple Black-Scholes financial market. For its solution I use a variational inequality. Second, I explain the challenges to satisfy requirement (ii) by the classical models and explain why new theories such as the benchmark approach and stochastic portfolio theory are needed. Third, I show recent development in methodology, I.e. backward stochastic differential equations and its solution by using deep learning can be a promising way to satisfy requirement (iii).

Abstract : The literature has of late redirected focus from aggregate level research on M&A activity to deal-specific level research. Prime among them relates to the optimum time required between deal announcement and deal completion. (Bhagwat, Dam, & Harford, 2016) posit that firm values substantially change between deal announcements and actual closing risking renegotiation or termination, indicating that this may lead to the abandonment of many deals resulting in a decrease in the level of deal activity. A question that remains to be answered is, even for those deals that eventually close, does waiting longer to close a deal benefit the acquirer or the newly formed company post-merger? In this paper, we investigate whether the time it takes till deal completion is a significant indicator of post-M&A performance and a determinant of the risk of failure. Our results show that deals that take an optimum time to negotiate and implement are more likely to perform well supporting the due diligence hypothesis, but when the time till completion takes too long, it is a warning indication of poor post-merger performance and subsequently failure supporting the overdue hypothesis.

Abstract : 헤지펀드 운용 전략을 간단히 소개하고 인공지능을 이용할 수 있는 사례와 방법론을 소개한다.

Abstract : We study an optimal consumption-leisure, investment, and voluntary retirement problem under subsistence consumption constraints. We construct closed-form solutions of optimal policies and algebraic equation of optimal retirement wealth boundary using dual/martingale method and variational inequality methods with Cobb-Douglas utility. In terms of marginal substitution rate between consumption and leisure, the subsistence consumption rate and the maximum leisure rate have a conflicting impact on the optimal policies and retirement wealth boundary. We perform sensitivity analyses on our model to examine the effects of subsistence consumption rate.

Abstract : 많은 Factor Based 퀀트펀드들이 2016년 이후 수익률이 저조해지고 있고 특히 2018년 많은 어려움을 겪었다. LSV논문으로 알려져 있는 Lakonishok, Shleifer, and Vishny, 1994, Contrarian Investment, Extrapolation, and Risk 에서 제안하는 extrapolation 의 관점에서 팩터모델의 미래예측 능력이 지난 15년간 퇴행했는지 검증해 보고 이 현상이 지속될 지 유추해 본다.

Abstract : We study a continuous-time growth model with limited commitment. We consider an infinite-horizon one-good economy where consists of continuum of agents and two types of financial intermediaries, creditors and insurers. The credit limit is determined endogenously by stochastic maximum principle. Similar to Acemoglu et al. (2008), we find the best subgame perfect market equilibrium (SPME) and the optimal consumption policy in the limited commitment case prescribes a strictly lower than by the first-best policy. When there is risky investment technology, in the limited commitment case, partial insurance is optimal. The optimal investment, however, can be both higher and Lowe than the first-best investment.

Abstract : This talk proposes a utility model in which agents require effort to learn how to consume effectively. In this model, there is a comfort zone of consumption beyond which an agent suffers a utility loss. The agent can enlarge the comfort zone by paying learning costs. We provide a utility function with the comfort zone and learning costs. The preference represented by the utility function is state-dependent and exhibits time-varying risk aversion even though the underlying utility function is state-independent and has a constant absolute or relative risk aversion coeffi cient. We provide a solution to a consumption/investment problem with the utility function and discuss the optimal policies. We also study a two-agent pure exchange equilibrium and derive asset pricing implications.

Abstract : In this talk, we provide a variable annuity (VA) contract embedded with a guaranteed minimum accumulated benefit rider that can choose option to surrender anytime before the maturity. In contrast to the model considered in Bernard et al. (2014), the surrender benefit in our problem is linked to the maximum value of between the policyholder's account value and the guaranteed minimum accumulated benefit. Under this circumstance, the VA contract has double surrender regions, that is, there exist two optimal surrender boundaries such that if the policyholder's account value hits these boundaries, then the policyholder immediately surrenders the VA contract. Based on the Mellin transform techniques, we derive the coupled integral equations for the two optimal surrender boundaries. We solve numerically these coupled integral equations by using the recursive integration method and provide comparative statics analysis with respect to various parameters. This talk is based on joint work with Minsuk Kwak.

Abstract : This article studies an optimal lifetime portfolio selection problem under stochastic labor income risk. We calibrate labor income profiles by fixed-effect regression with Korean Labor and Income Panel study. We solve the problem using grid search with Monte-Carlo simulation of stochastic environments of stock market and unhedgeable income process. The numerical results show optimal investments through a worker’s lifetime: risk-taking for the younger; gradually tilting to risk-free savings until the retirement; and yet active betting against rapid wealth decumulation since then. The result gives implication for the retirement market, such as Target-Date Funds’ glide path.

Abstract : Between January 2016 and February 2018, Bitcoin were in Korea on average 4.73% more expensive than in the United States, a fact commonly referred to as the Kimchi premium. We argue that capital controls create frictions as well as amplify existing frictions from the microstructure of the Bitcoin network that limit the ability of arbitrageurs to take advantage of persistent price differences. We find that the Bitcoin premia are positively related to transaction costs, confirmation time in the blockchain, and to Bitcoin price volatility in line with the idea that the delay and the associated price risk during the transaction period make trades less attractive for risk averse arbitrageurs and hence allow prices to diverge. A cross country comparison shows that Bitcoin trades at higher prices in countries with lower financial freedom. Finally unlike the prediction from the stock bubble literature, the Kimchi premium is negatively related to the trading volume, which also suggests that the Bitcoin microstructure is important to understand the Kimchi premium.

Abstract : We document the bi-modality of high- and low-momentum stocks' cross-sectional distributions, which makes momentum strategies fundamentally risky. A cross-sectional prediction model based on momentum and deep neural network alleviates the bi-modality and improves portfolio performance significantly. Tested on the US market from 1975.01 to 2017.01, an equal-weighted portfolio earns an annualized mean return around 50\% and a Sharpe ratio above 2.8, and a value-weighted portfolio earns 39% and 1.8. The performance can be further improved to tremendous 118% and 2.7 when the portfolio is constructed from the top and bottom 1%. Remarkably, the portfolios do not suffer from momentum crashes.