Meir Statman Volume 9, Number 2, Second Quarter 2011 A belief that markets are efficient is blamed for instigating the crisis we are in and lulling us into complacency as the crisis was approaching. But the debate about the role of such belief in the crisis is unfocused for two reasons. First, a lack of… Read more
Archives
PRACTITIONER’S DIGEST
Volume 9, Number 2, Second Quarter 2011 View PDF… Read more
BOOK REVIEWS: The Big Short – Inside The Doomsday Machine
Volume 9, Number 1, First Quarter 2011 The Big Short-Inside The Doomsday Machine Michael Lewis Reviewed by Javier Estrada View PDF… Read more
CASE STUDIES: Closet Indexing
Jack L. Treynor Volume 9, Number 1, First Quarter 2011 View PDF… Read more
Has Hedge Fund Alpha Disappeared?
Manuel Ammann, Otto Huber and Markus Schmid Volume 9, Number 1, First Quarter 2011 This paper investigates the alpha generation of the hedge fund industry based on a recent sample compiled from the Lipper/TASS database covering the time period from January 1994 to September 2008. We find a positive average hedge fund alpha in the… Read more
The National Transportation Safety Board: A Model for Systemic Risk Management
Eric Fielding, Andrew W. Lo and Jian Helen Yang Volume 9, Number 1, First Quarter 2011 We propose the National Transportation Safety Board (NTSB) as a model organization for addressing systemic risk in industries and contexts other than transportation. When adopted by regulatory agencies and the transportation industry, the safety recommendations of the NTSB have… Read more
The Supply and Demand of Alpha
Harry Markowitz, Robert Snigaroff and David Wroblewski Volume 9, Number 1, First Quarter 2011 This paper analyzes the supply and demand for alpha by institutional investors and the money managers who serve them. A large database of products offered by such managers is used to estimate how the demand for such products increases as a… Read more
Decentralized Downside Risk Management
Andrea Reed, Cristian Tiu and Uzi Yoeli Volume 9, Number 1, First Quarter 2011 The process of risk management for institutional investors faces two challenges. First, since most institutions are decentralized in contrast to being direct investors in assets, it is difficult to separate the risks of the assets in the portfolio from the risks… Read more
PRACTITIONER’S DIGEST
Volume 9, Number 1, First Quarter 2011 View PDF… Read more
BOOK REVIEW: The Little Book of Safe Money / The Little Book of Bulletproof Investing
Volume 8, Number 4, Fourth Quarter 2010 The Little Book of Safe Money Jason Zweig Reviewed by Javier Estrada The Little Book of Bulletproof Investing Ben Stein and Phil Demuth Reviewed by Javier Estrada View PDF… Read more
CASE STUDIES: Linear Causality
Jack L. Treynor Volume 8, Number 4, Fourth Quarter 2010 View PDF… Read more
What’s the Best Way to Trade Using the January Barometer?
Michael J. Cooper, John J. McConnell and Alexei V. Ovtchinnikov Volume 8, Number 4, Fourth Quarter 2010 According to Streetlore, as embedded in the adage “As goes January so goes the rest of the year,” the market return in January provides useful information to would-be investors in that the January market return predicts the market… Read more
The Rule of 72 for Lifetime Savings
Thomas K. Philips Volume 8, Number 4, Fourth Quarter 2010 Financial planners often impress upon their clients the power of compounding by quoting them the Rule of 72: With annual compounding, a dollar invested in an investment account at a constant interest rate of r% per annum grows to two dollars in approximately 72/r years… Read more
How Quickly Do Equity Prices Converge to Intrinsic Value?
Dennis R. Capozza and Ryan D. Israelsen Volume 8, Number 4, Fourth Quarter 2010 This research hypothesizes that in markets where information costs, transactions costs and the economic impact of information can vary widely, we should expect both significant predictability and systematic variation in the predictability. Controlling for other factors, we find that on average… Read more
Equally Weighted Rebalancing as the Average of all Investment Strategies
Masahito Shimizu Volume 8, Number 4, Fourth Quarter 2010 In a performance evaluation, it is important for both sponsors and portfolio managers to estimate the opportunity set of possible performances. In this regard, we investigate the average performance of all possible strategies and how performance varies across strategies. We show that the average is equal… Read more
SURVEYS AND CROSSOVERS: Implementing Option Pricing Models Using Python and Cython
Sanjiv R. Das and Brian Granger Volume 8, Number 4, Fourth Quarter 2010 In this article we propose a new approach for implementing option pricing models in finance. Financial engineers typically prototype such models in an interactive language (such as Matlab) and then use a compiled language such as C/C++ for production systems. Code is… Read more
INSIGHTS: A New Taxonomy of the Dynamic Term Structure Models
Sanjay K. Nawalkha, Natalia A. Beliaeve and Gloria Soto Volume 8, Number 4, Fourth Quarter 2010 This paper gives a new taxonomy of dynamic termstructure models (TSMs) that classifies all existing TSMs as either fundamental models or preference-free single-plus, double-plus, and triple-plus models.We exemplify the new taxonomy by considering preference-free versions of some well-known fundamental… Read more
PRACTITIONER’S DIGEST
Volume 8, Number 4, Fourth Quarter 2010 View PDF… Read more
BOOK REVIEWS: This Time is Different: Eight Centuries of Financial Crisis
Volume 8, Number 3, Third Quarter 2010 This Time is Different: Eight Centuries of Financial Crisis Carmen M. Reinhart and Kenneth S. Rogoff Reviewed by Bruce Grantier View PDF… Read more
CASE STUDIES: Momentum Stocks
Jack L. Treynor Volume 8, Number 3, Third Quarter 2010 View PDF… Read more
An Improved Implied Copula Model and Its Application to the Valuation of Bespoke CDO Tranches
John Hull and Alan White Volume 8, Number 3, Third Quarter 2010 In Hull and White (2006) we showed how CDO quotes can be used to imply a probability distribution for the hazard rate over the life of the CDO. This is known as the implied copula model. In this paper we develop a parametric… Read more
CROSSOVERS & SURVEYS – The Libor/SABR Market Models: A Critical Review
Sanjay K. Nawalkha Volume 8, Number 3, Third Quarter 2010 This paper reviews the LIBOR market model (LMM) and the LMM-SABR model. While a plethora of interest rate models, such as fundamental models, single-plus models, double-plus models, and triple-plus models, can be used for valuation of plain vanilla derivatives, only a few models such as… Read more
Do Informed Investors Cause Momentum?
James H. Scott and Jorge A. Murillo Volume 8, Number 3, Third Quarter 2010 We show that there will be expected momentum in stock returns if there are informed and uninformed investors, and if informed investors know the mean of the stocks future fundamental value. We use analysts estimates to construct a truncated valuation formula… Read more
A Bayesian Approach to Stress Testing and Scenario Analysis
Riccardo Rebonato Volume 8, Number 3, Third Quarter 2010 I present a new approach to stress testing that combines the elicitation of subjective (marginal or conditional) probabilities of events with the specification of a simple causal structure among them. By so doing, stress events are placed in an approximate but coherent probabilistic framework. The approach… Read more
The Asset Growth Effect in Stock Returns
Michael J. Cooper, Huseyin Gulen and Michael J. Schill Volume 8, Number 3, Third Quarter 2010 We document a strong negative relationship between the growth of total firm assets and subsequent firm stock returns using a broad sample of U.S. stocks. Over the past 40 years, low asset growth stocks have maintained a return premium… Read more