Investment management

Summary

Investment management (sometimes referred to more generally as asset management) is the professional asset management of various securities, including shareholdings, bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of investors. Investors may be institutions, such as insurance companies, pension funds, corporations, charities, educational establishments, or private investors, either directly via investment contracts/mandates or via collective investment schemes like mutual funds, exchange-traded funds, or REITs. The term investment management is often used to refer to the management of investment funds, most often specializing in private and public equity, real assets, alternative assets, and/or bonds. The more generic term asset management may refer to management of assets not necessarily primarily held for investment purposes. Most investment management clients can be classified as either institutional or retail/advisory, depending on

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https://en.wikipedia.org/wiki/Investment_management

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This thesis consists of three chapters. The first chapter endogenizes technological change by introducing a stylized innovation process driven by a R&D–dependent Poisson process in a Cox, Ingersoll and Ross (1985) production economy. The model reproduces some of the features of the long-run risk literature, that is, endogenous consumption growth departs slightly from the i.i.d. framework, and shocks to realized and expected consumption growth are priced in equilibrium. Equilibrium dynamics suggest the use of general investment based measures, such as the R&D-to-capital ratio, to identify the long-run risk component in aggregate consumption growth. The second chapter examines the impact of risk-based portfolio constraints on asset prices in a standard exchange economy model where agents have different risk aversion. Constrained agents scale down their benchmark portfolio and behave locally like power utility investors with risk aversion that depends on current market conditions. The equilibrium is characterized using the consumption share of the constrained agents and allows for explicit existence results. The imposition of constraints on active market participants dampens fundamental shocks when they bind, a result that challenges recent studies that suggest that risk management rules serve to amplify aggregate fluctuations. The results also dispute the belief that capital regulations make financial crises larger and more costly, as constraints are more likely to bind in bad times. Constraints may give rise to equilibrium asset pricing bubbles, a result that is associated to the risk aversion distribution across agents and the severity of the constraint. The third chapter studies a pure exchange economy with three types of agents: constrained agents are subject to portfolio constraints, unconstrained agents are free to choose the composition of their portfolio and face a standard nonnegativity constraint on wealth, and arbitrageurs, who are unconstrained, and may incur in marked-to-market losses which are bounded by a state-dependent constraint. This credit condition is valuable when there are asset pricing bubbles, which arise endogenously because of the presence of constrained agents. The size of bubbles depends, primarily, on the ability of the arbitrageur to exploit the arbitrages available due to the mispriced assets, and hence, on the credit conditions. The bubble on the stock vanishes in the limit of infinite credit. Even though all agents have logarithmic utility, the stock price and volatility display the "leverage effect". The impact of the form of the wealth constraint on the results is also assessed.

EPFL2010

Macroeconomic conditions and a firm's investment decisions

Michi Nishihara

We propose a model of a firm's reversible investment decision with macroeconomic conditions based on optimal switching of a diffusion regime. The switching costs and the cash flow generated from the firm depend on a business cycle alternating via a Markov chain, and the triggers of investment and disinvestment in each state are determined endogenously. Provided the investment costs are cyclical due to high wages and rents in a boom, the investment tends to be delayed in boom, while the disinvestment is likely to be made earlier in terms of the level of switching triggers. This result shows us that the 'hysteresis' of investment is a rigorous phenomenon that does not change dramatically depending on business cycle. Yet, the business cycle may still amplify and propagate the exogenous shocks from macroeconomic conditions as far as the persistence of business cycle is concerned. In particular, the investment is deferred and the disinvestment occurs earlier when recession lasts longer and boom ends soon. (C) 2014 Elsevier Inc. All rights reserved.

Academic Press Inc Elsevier Science2014

The effects of business cycle and debt maturity on a firm's investment and default decisions

Michi Nishihara

We propose a model that jointly determines the capital structure and investment decisions taking business cycle and debt maturity into account. It endogenously determines the triggers of investment/disinvestment and default, which depend on the state of the economy. The investment triggers can be unimodal or bimodal with respect to debt maturity depending on the volatility of the growth opportunities. The optimal leverage ratio tends to increase as recession shortens, which induces higher yield spreads for short-term debt; but long-term debt is more affected by increase of expected cash flow, and thus the yield spreads decrease. (C) 2015 Elsevier Inc. All rights reserved.

Elsevier Science Bv2015

EPFL2010