Jack L. Treynor Volume 10, Number 4, Fourth Quarter 2012 View PDF… Read more
Archives
Was the Writing on the Wall? An Options Analysis of the 2008 Lehman Brothers Crisis
Zhirong Chen and Wai Mun Fong Volume 10, Number 4, Fourth Quarter 2012 This paper uses risk neutral densities (RNDs) of stock options to investigate the markets perceptions of crash risk in the recent U.S. subprime crisis. RNDs were estimated using the double lognormal method for the S&P 500 market index, Lehman Brothers, Merrill Lynch… Read more
The Role of Stress Testing in Credit Risk Management
Roger M. Stein Volume 10, Number 4, Fourth Quarter 2012 In this article, we outline some concepts relating to the use of stress testing in credit risk management. We begin by providing a simple taxonomy of stress scenarios and discussing the trade-offs that different approaches require for implementation. Our taxonomy is modeled after one that… Read more
The Controversy in Fundamental Indexation: Why Both Sides of the Argument are (Mostly) Correct
Michael Dempsey Volume 10, Number 4, Fourth Quarter 2012 We examine the contribution of noise to the theoretical underpinnings of Fundamental Indexation (FI). Although we argue that market capital-weighted indexes do not incur a structural drag due to noise as claimed by the proponents of FI, we conclude, nevertheless, that noise as advanced by FI… Read more
Coherent Asset Allocation and Diversification in the Presence of Stress Events
Riccardo Rebonato and Alexander Denev Volume 10, Number 4, Fourth Quarter 2012 We propose a method to integrate frequentist and subjective probabilities in order to obtain a coherent asset allocation in the presence of stress events. Our working assumption is that in normal market asset returns are sufficiently regular for frequentist statistical techniques to identify… Read more
Portfolio Monitoring In Theory and Practice
Richard O. Michaud, David N. Esch and Robert O. Michaud Volume 10, Number 4, Fourth Quarter 2012 The when-to-trade decision is a critical yet neglected component of modern asset management. Typical rebalancing rules are based on suboptimal heuristics. Rebalancing is necessarily a statistical similarity test between current and proposed optimal portfolios. Available tests ignore many… Read more
PRACTITIONER’S DIGEST
Voulume 10, Number 4, Fourth Quarter 2012 View PDF… Read more
BOOK REVIEWS: What Investors Want / Pension Finance: Putting the Risk and Cost of Defined Benefit Plans Under Your Control
Volume 10, Number 3, Third Quarter 2012 What Investors Want Meir Statman Reviewed by Manny Hunjan Pension Finance: Putting the Risk and Costs of Defined Benefit Plans Under Your Control M. Barton Waring Reviewed by Bruce Grantier View PDF… Read more
CASE STUDIES: Investing Early for Retirement
Jack L. Treynor Volume 10, Number 3, Third Quarter 2012 View PDF… Read more
A New Perspective on the Validity of the CAPM: Still Alive and Well
Moshe Levy and Richard Roll Volume 10, Number 3, Third Quarter 2012 The Capital Asset Pricing Model (CAPM) has far-reaching practical implications for both investors and corporate managers. The model implies that the market portfolio is mean-variance efficient, and thus advocates passive investment. It also provides the most widely used measure of risk, beta, which… Read more
Estimating the Negative Impact of “Noise” on the Returns of Cap-Weighted Portfolios In Various Segments of the Equity Markets
Russell J. Fuller, Bing Han and Yining Tung Volume 10, Number 3, Third Quarter 2012 Capital Market Theory assumes that the ex ante market portfolio (which is cap-weighted) lies on the (ex ante) efficient frontier. However, we show that ex ante cap-weighted portfolios will always be interior portfolios relative to the end-of-investment-period ex post efficient… Read more
The Relative Strength of Industries versus Countries in Global Equity Markets
Jose Menchero and Andrei Morozov Volume 10, Number 3, Third Quarter 2012 The relative strength of industries versus countries is of great practical interest for global equity investors. In this article, we investigate the relative strength of these effects in the global equity markets over the sample period 1994-2010. In particular, we examine three market… Read more
How Does Your State Stack Up? Participation Costs in Higher Education Optional Retirement Plans
Daniel Bradley and Lei Wedge Volume 10, Number 3, Third Quarter 2012 We examine the costs to higher education employees investing in optional retirement plans (ORP). We find vast differences across states in terms of the number of providers, number of funds offered per provider, and fees. We find the same provider offering the same… Read more
Redemption Fees and the Risk-Adjusted Performance of International Equity Mutual Funds
Iuliana Ismailescu and Matthew Morey Volume 10, Number 3, Third Quarter 2012 In the wake of the market timing and late trading mutual fund scandals, many mutual funds adopted redemption fees to limit market timing. In this paper we investigate the impact of redemption fees on the risk-adjusted performance of U.S. based international equity funds… Read more
PRACTITIONER’S DIGEST
Volume 10, Number 3, Third Quarter 2012 View PDF… Read more
BOOK REVIEWS: Financial Risk Management – Models, History, and Institutions
Volume 10, Number 2, Second Quarter 2012 Financial Risk Management – Models, History, and Institutions By Allan M. Malz Reviewed by Bruce Grantier View PDF… Read more
CASE STUDIES: The Race Between the Work Force and Investment
Jack L. Treynor Volume 10, Number 2, Second Quarter 2012 View PDF… Read more
The Downside of High Water Marks: An Empirical Study
Sugata Ray Volume 10, Number 2, Second Quarter 2012 Using a large sample of hedge funds, I study the effects of the high water mark (HWM) on fund performance, risk, and fund closure. I find that as funds fall below the HWM, the standard deviation of future returns increases, the future expected Sharpe ratio decreases… Read more
Insights: On the Kurz Model of Asset Prices with Rational Beliefs
Craig W. French Volume 10, Number 2, Second Quarter 2012 Mordecai Kurz has proposed an asset pricing model incorporating endogenous uncertainty. Kurz contrasts Rational Belief Equilibrium (RBE) with the more familiar theory of Rational Expectations Equilibrium (REE). In RBE, the aggregate market will generally misprice assets and stock returns can be explained by forecasting mistakes… Read more
Hedge-Fund Performance and Liquidity Risk
Ronnie Sadka Volume 10, Number 2, Second Quarter 2012 This paper demonstrates that liquidity risk as measured by the covariation of fund returns with unexpected changes in aggregate liquidity is an important predictor of hedge fund performance. The results show that funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6.5%… Read more
Asset Allocation Dynamics in the Hedge Fund Industry
Li Cai and Bing Liang Volume 10, Number 2, Second Quarter 2012 This paper examines asset allocation dynamics of hedge funds through conducting optimal change point test on an asset class factor model. Based on the average F-test and the Bayesian Information Criterion (BIC), we find that more dynamic hedge funds exhibit significantly better quality… Read more
Liquidity Shocks and Hedge Fund Contagion
Nicole M. Boyson, Christof W. Stahel and René M. Stulz Volume 10, Number 2, Second Quarter 2012 In Boyson, Stahel, and Stulz (2010), we investigate whether hedge funds experience worst return contagion that is, correlations in extremely poor returns that are over and above those expected from economic fundamentals. We find strong evidence of contagion… Read more
PRACTITIONER’S DIGEST
Volume 10, Number 2, Second Quarter 2012 View PDF… Read more
BOOK REVIEWS: Expected Returns: An Investor’s Guide to Harvesting Market Rewards
Volume 10, Number 1, First Quarter 2012 Expected Returns: An Investor’s Guide to Harvesting Market Rewards Antti Ilmanen Reviewed by Graham Rennison View PDF… Read more
CASE STUDIES: Baby Boomers in Retirement
Jack L. Treynor Volume 10, Number 1, First Quarter 2012 View PDF… Read more