Volume 13, Number 3, (2015) Craig William French We examine whether the value of active investment management can exceed its cost, and find that it can, by a substantial margin. We consider the 0.67% average cost estimate in French (2008), comparing it with the expected value of a known active investment strategy. For a “passive”… Read more
Articles
Valuing High Yield Bonds: A Business Modeling Approach
Thomas S. Y. Ho and Sang Bin Lee This paper proposes a valuation model of a bond with default risk. Extending from the Brennan and Schwartz real option model of a firm, the paper treats the firmas a contingent claim on the business risk. This paper introduces the “primitive firm,” which enables us to value… Read more
Strategic Asset Allocation with Low-Risk Stocks: A Bootstrap Analysis
Wai Mun Fong and Timothy Koh Traditional asset allocations such as the 60/40 portfolio of stocks/bonds are not as well diversified as many investors believe since almost all the portfolio’s returns are driven by the stock component. This paper examines a novel approach to strategic allocation by combining stocks with low betas and high dividend… Read more
Alternative Currency Hedging Strategies With Known Covariances
Wei Chen, Mark Kritzman and David Turkington Informed investors understand that they should hedge at least some of their portfolios’currency exposure, but the best strategy for doing so remains an open question. We investigate a variety of currency hedging strategies, including linear strategies, non-linear strategies, and combinations thereof, for the purpose of helping investors determine… Read more
Growth Optimal Portfolio Insurance for Long-Term Investors
Daniel Mantilla-García We solve the growth-rate optimal multiplier of a portfolio insurance strategy in the general case with a locally risky reserve asset and stochastic state variables. The level of the optimal time-varying multiplier turns out to be lower than the standard constant multiplier of Constant Proportion Portfolio Insurance (CPPI) for common parameter values. As… Read more
A Structural Macro-Financial Model an Macro-Risk Management
Thomas S. Y. Ho and Sang Bin Lee This paper provides a structural macro-financial model that can be used for the cost and benefit analysis of alternative financial regulatory regimes. The model solves for the optimal financial sector size to the real aggregate asset (household leverage) and to the aggregate capital (financial leverage) that maximize… Read more
Equity Indices’ Returns: Contingent Claims on GDP Stochastic Movements
Thomas S.Y. Ho and Sang Bin Lee This paper proposes an equity index contingent claim model. The model assumes that the equity broad-based market indices’stochastic movements are contingent to macroeconomic risk factors that are derived from Ho et al.’s (HPS, 2012, 2013) and Ho and Lee’s (HL, 2015b, 2015c) theoretical models. The results show that… Read more
Impact of Credit Markets on Dynamic Stochastic Real Aggregate Production
Thomas S. Y. Ho and Sang Bin Lee This paper provides a dynamic stochastic macro-financial model that describes the impact of the credit market on real production risk and provides some empirical evidence of the reasonableness of the model. Our model shows that the uncertain real sector output affects the performance of the credit market… Read more
Momentum, Acceleration, and Reversal
James X. Xiong and Roger G. Ibbotson This paper studies the impact of accelerated stock price increases on future performance. Accelerated stock price increases are a strong contributor to both poor future performance and a higher probability of reversals. It implies that accelerated growth is not sustainable and can lead to drops. The acceleration mechanism… Read more
Investing With Style
Clifford S. Asness, Antti Ilmanen, Ronen Israel and Tobias J. Moskowitz Investors are bombarded by a variety of investment strategies from a growing and increasingly complex financial industry, each claiming to improve returns and reduce risk. Amid the clamor, academic research has sifted through the vast landscape and found four intuitive investment strategies that, when… Read more