Sharon Hill and Chris Gowlland Volume 10, Number 1, First Quarter 2012 Modern portfolio theory suggests that investors can achieve maximum diversification holding a portfolio of risky assets reflecting the entire market, but no generally accepted method exists to construct such a portfolio. We present data on global equities and global fixed-income securities since 1990… Read more
Archives
Timing the Value Style Index in a Markov Regime-Switching Model
Hany Guirguis, Ted Theodore and Michael Suen Volume 10, Number 1, First Quarter 2012 We construct and test a popular indicator for timing value style investment: the earnings yield dispersion (EYD). Conventional wisdom holds that one should invest in value style when there is a wide dispersion in earnings yield (E/P ratios) across the equity… Read more
Lifecycle Consumption-Investment Policies and Pension Plans: A Dynamic Analysis
Zvi Bodie, Jérôme Detemple and Marcel Rindisbacher Volume 10, Number 1, First Quarter 2012 This paper explores the optimal design of personal pensions based on the economic theory of the life cycle. It assumes that individuals derive utility from consumption of goods and leisure and that at some date they retire and stop earning income… Read more
Insights: Live Prices and Stale Quantities: T+1 Accounting and Mutual Fund Mispricing
Peter Tufano, Michael Quinn and Ryan Taliaferro Volume 10, Number 1, First Quarter 2012 Most mutual funds use day-old fund holdings but current-day prices to calculate net asset values. This practice, sanctioned under SEC Rule 2a-4, results in deviations between reported net asset values (NAVs) and returns and the economic values of those quantities. Using… Read more
PRACTITIONER’S DIGEST
Volume 11, Number 1, First Quarter 2013 View PDF… Read more
BOOK REVIEWS: Debunkery: Learn It, Do It, and Profit From It – Seeing Through Wall Street’s Money-Killing Myths
Volume 9, Number 4, Fourth Quarter 2011 Debunkery: Learn It, Do It, and Profit From It – Seeing Through Wall Street’s Money-Killing Myths Ken Fisher and Lara Hoffman Reviewed By Bruce Grantier View PDF… Read more
CASE STUDIES: Understanding the Middle East
Jack L. Treynor Volume 9, Number 4, Fourth Quarter 2011 View PDF… Read more
Efficient Indexation: An Alternative to Cap-Weighted Indices
Noël Amenc, Felix Goltz, Lionel Martellini and Patrice Retkowsky Volume 9, Number 4, Fourth Quarter 2011 This paper introduces a novel method for the construction of equity indices that, unlike their cap-weighted counterparts, offer an efficient risk/return trade-off. The index construction method goes back to the roots of modern portfolio theory and focuses on the… Read more
Insights: What Taleb Can Learn From Markowitz
Jack L. Treynor Volume 9, Number 4, Fourth Quarter 2011 Markowitz’ 1959 book introduced a concept of value that could actually be tested. Markowitz’s quite general conditions can lead to the Central Limit Theorem. Consider weekly returns on Markowitz’s random wheel. Then annual returns on actual prices would have 52 terms reflecting returns on value… Read more
Managing the Volatility of Alpha Models
Tony Elavia and Migene Kim Volume 9, Number 4, Fourth Quarter 2011 After posting good performance for over two decades, quantitative equity investment managers have recently produced weak returns. We develop a measure of risk and show how changes in risk provide a common framework to explain factor returns and past underperformance. We find that… Read more
Pairs – Trading on Divergent Analyst Recommendations
Susana Yu Volume 9, Number 4, Fourth Quarter 2011 Pairs-trading is a short-term, self-financing arbitrage strategy in which buy and sell positions are simultaneously placed on two stocks whose prices have moved temporarily apart after following a long parallel path. We develop a new pairs-trading rule based on financial analysts’ buy/hold/sell recommendations from IBES Details… Read more
Another Look at Idiosyncratic Volatility and Expected Returns
Wei Huang, Qianqiu Liu, S. Ghon Rhee and Liang Zhang Volume 9, Number 4, Fourth Quarter 2011 We conduct comprehensive analyses of the return characteristics of stock portfolios sorted by idiosyncratic volatility. We show that the relationship between idiosyncratic volatility and expected stock returns depends on whether the portfolio is composed of stocks with extreme… Read more
BOOK REVIEWS: Bond Portfolio Investing and Risk Management
Volume 9, Number 3, Third Quarter 2011 Bond Portfolio Investing and Risk Management Vineer Bhansali Reviewed by Sebastien Page View PDF… Read more
CASE STUDIES: The Nutty Professor (36)
Jack L. Treynor Volume 9, Number 3, Third Quarter 2011 View PDF… Read more
Fat Tails and Stop-Losses in Portable Alpha
Mark B. Wise, Yonathan Schwarzkopf and Vineer Bhansali Volume 9, Number 3, Third Quarter 2011 We investigate the optimal stop-loss on the alpha investment for a portable alpha vehicle. The optimal stop-loss maximizes investors utility of wealth for a portfolio consisting of a portable alpha fund and risk free assets. We model the dynamics of… Read more
Hedge Funds: A Sensible Approach to Oversight
Antony E. Ghee Volume 9, Number 3, Third Quarter 2011 After years of debating whether additional regulation should be imposed on hedge funds, legislative initiatives, such as the Dodd-Frank Act, have recently been enacted and could significantly alter the scope of government oversight in an industry that has, until recently, been subject to little regulatory… Read more
Portfolio Diversification
James A. Bennett and Richard W. Sias Volume 9, Number 3, Third Quarter 2011 Contrary to conventional wisdom, there is no evidence investors can, or have ever been able to, easily form portfolios containing negligible exposure to unsystematic returns. Because well-diversified portfolios are the bedrock upon which so much financial theory is built, investors’ inability… Read more
The Performance, Pervasiveness, and Determinants of Value Premium in Different US Exchanges: 1985-2006
George Athanassakos Volume 9, Number 3, Third Quarter 2011 Using AMEX, NASDAQ and NYSE stock market data for the period 1985-2006, this paper sheds further light into the value premium and the discussion of whether the value premium is driven by risk or behavioral factors. The paper utilizes a more comprehensive set of data and… Read more
INSIGHTS: What Interest Rate Models To Use? Buy Side Versus Sell Side
Sanjay K. Nawalkha and Riccardo Rebonato Volume 9, Number 3, Third Quarter 2011 Does the selection of a specific interest rate model to use for pricing, hedging, and risk return analysis depend upon whether the user is a buy-side institution or a sell-side dealer bank? Sanjay Nawalkha and Riccardo Rebonato debate this question in this… Read more
SURVEYS AND CROSSOVERS: Random Lattices for Option Pricing Problems in Finance
Sanjiv R. Das Volume 9, Number 2, Second Quarter 2011 While the use of Monte Carlo methods is well established for pricing derivatives, this paper focuses on a random-lattice approach, also known in the literature as the stochastic-mesh method. The method is reviewed here. We show that the method may be refined with an ad-hoc… Read more
BOOK REVIEWS: The Endowment Model Of Investing: Return, Risk and Diversification
Volume 9, Number 2, Second Quarter 2011 The Endowment Model Of Investing: Return, Risk and Diversification Martin L. Leibowitz, Anthony Bova, P. Brett Hammond Reviewed by Bruce Grantier View PDF… Read more
CASE STUDIES: A Lively Expectation of Favors Yet to be Received
Jack L. Treynor Volume 9, Number 2, Second Quarter 2011 View PDF… Read more
Robust Portfolio Rebalancing with Transaction Cost Penalty An Empirical Analysis
Vitaly Serbin, Milan Borkovec and Michael Chigirinskiy Volume 9, Number 2, Second Quarter 2011 The goal of this paper is to study and compare two popular techniques used by practitioners to reduce the sensitivity of optimal portfolios to uncertainty in expected return for a typical portfolio optimization problem. Specifically, we investigate whether including transaction costs… Read more
Multiple Time Scale Attribution for Commodity Trading Advisor (CTA) Funds
Brian T. Hayes Volume 9, Number 2, Second Quarter 2011 Commodity trading advisors (CTAs) make directional investments in liquid futures and forward markets. Since CTAs generally do not engage in security selection or relative value trades, their performance depends to a large extent on funds ability to time market exposures. We analyze CTA return attribution… Read more
Predicting Financial Distress and the Performance of Distressed Stocks
John Y. Campbell, Jens Hilscher and Jan Szilagyi Volume 9, Number 2, Second Quarter 2011 In this paper, we consider the measurement and pricing of distress risk. We present a model of corporate failure in which accounting and market-based measures forecast the likelihood of future financial distress. Our best model is more accurate than leading… Read more