Harry M. Kat Volume 2, Number 1, First Quarter 2004 We study the possible role of managed futures in portfolios of stocks, bonds and hedge funds. We find that allocating to managed futures allows investors to achieve a very substantial degree of overall risk reduction at, in terms of expected return, relatively limited costs. Adding… Read more
Archives
Great Moments in Financial Economics: III. Short-Sales and Stock Prices
Mark Rubinstein Volume 2, Number 1, First Quarter 2004 This is the third in a series of articles on Great Moments in Financial Economics to appear in the Journal. For each, the purpose is to trace, as well as the author can, the history of the development of an important idea. In this case, the… Read more
INSIGHTS: The Market Maker in the Age of the ECN
Wayne H. Wagner Volume 2, Number 1, First Quarter 2004 Electronic trading venues demonstrate an impressive ability to successfully match trades with high accuracy, low cost, and at remarkable speeds. Are they on track to take over the trading process, or will there always be activities better performed by human beings… Read more
BOOK REVIEWS: Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals / Modern Investment Management: An Equilibrium Approach
Volume 1, Number 4, Fourth Quarter 2003 Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals Zvi Bodie and Michael Clowes Reviewed by Thomas J. Connelly Modern Investment Management: An Equilibrium Approach Bob Litterman Reviewed by Edouard Stirling View PDF… Read more
WORKING PAPER REVIEWS: Liquidity and Bond Markets
Sanjiv R. Das, Jan Ericsson and Madhu Kalimipalli Volume 1, Number 4, Fourth Quarter 2003 View PDF… Read more
CASE STUDIES: Default-Shawnee Manufacturing
Jack L. Treynor Volume 1, Number 3, Third Quarter 2003 View PDF… Read more
Indexation of Momentum Effects
Eugene Y. Lee Volume 1, Number 4, Fourth Quarter 2003 Momentum is now viewed as another factor of equity returns in addition to such factors as beta, market capitalization, and market-to-book ratio. In this paper, I propose indexation of momentum effects to pave the way for development of the momentum-based investment products and for improved… Read more
Long-Run Investment Management Fee Incentives and Discriminating Between Talented and Untalented Managers
Robert Ferguson and Dean Leistikow Volume 1, Number 4, Fourth Quarter 2003 Ferguson and Leistikow [(1997). Journal of Financial Engineering 6, 1-13] (FLa) was the first long-run risk-neutral analysis of the performance volatility incentives created by investment management fee structures. This paper extends FLa in six ways. It allows the portfolio’s value to change, incorporates… Read more
Resampled Frontiers vs Diffuse Bayes: An Experiment
Harry M. Markowitz and Nilufer Usmen The experiment reported here compares two methods for handling uncertain inputs to a mean-variance analysis. Specifically, it compares Michaud’s resampled frontier versus Bayesian inference with diffuse prior. A simulated “referee” generates ten “truths” about 8 asset classes. For each truth it randomly generates one hundred histories. A simulated “Bayes… Read more
WORKING PAPER REVIEWS: Contagion
Sanjiv Ranjan Das Volume 1, Number 3, Third Quarter 2003 View PDF… Read more
CASE STUDIES: A Prudent Man
Jack L. Treynor Volume 1, Number 3, Third Quarter 2003 View PDF… Read more
Fund Managers May Cause Their Benchmarks to be Priced “Risks”
Michael Stutzer Volume 1, Number 3, Third Quarter 2003 The presence of a positive intercept (“alpha”) in a regression of an investment fund’s excess returns on a broad market portfolio’s excess return (as in the CAPM) and other “factor” portfolios’ excess returns (e.g. the Fama and French factors) is frequently interpreted as evidence of superior… Read more
Do Short Sellers Cause the Weekend Effect?
Honghui Chen and Vijay Singal Volume 1, Number 3, Third Quarter 2003 We provide a new explanation for the weekend effect. Our hypothesis is based on the contention that speculative short sellers are unwilling or less likely to hold their positions over long non-trading periods, typically the weekend. Therefore, they buy to cover on Fridays… Read more
Enhanced Equity Indexers: Common Traits and Surprising Differences
James Scott and Margaret Stumpp Volume 1, Number 3, Third Quarter 2003 This paper investigates the type of returns-based data a consultant or institutional investor would confront when analyzing an existing enhanced index manager or searching for a new one. The paper presents findings about different types of enhanced managers. Among them, and not surprisingly… Read more
Is Stock Return Predictability Spurious?
Wayne E. Ferson, Sergei Sarkissian, and Timothy Simin Volume 1, Number 3, Third Quarter 2003 Two problems, spurious regression bias and naive data mining, conspire to mislead analysts about predictive models for stock returns. This article demonstrates the two problems, how they interact, and makes suggestions for what to do about it… Read more
Time Diversification
Jack L. Treynor Volume 1, Number 1, First Quarter 2003 To maintain constant dollar risk, an investor concerned with his terminal wealth must sell when the stock market rises and buy when it falls. Although an asset with constant dollar risk doesn’t exist in nature, it can be approximated with actual investment positions… Read more
BOOK REVIEWS: Iceberg Risk: An Adventure in Portfolio Theory / Practical Spectulation
Volume 1, Number 2, Second Quarter 2003 Iceberg Risk: An Adventure in Portfolio Theory Kent Osband Reviewed by Craig W. French Practical Speculation Victor Niederhoffer and Laurel Kenner Reviewed by Mark Kritzman View PDF… Read more
WORKING PAPERS: Hedge Funds
Sanjiv R. Das Volume 1, Number 2, Second Quarter 2003 View PDF… Read more
The Treynor Capital Asset Pricing Model
Craig W. French Volume 1, Number 2, Second Quarter We explore unpublished early work of Jack Treynor, who deserves credit for the original Capital Asset Pricing Model because of his revolutionary manuscripts, “Market Value, Time, and Risk” and “Toward a Theory of Market Value of Risky Assets”, which were circulated during the 1960s but have… Read more
Fiscal Policy and Inflation: Pondering the Imponderables
Eric M. Leeper Volume 1, Number 2, Second Quarter 2003 An asset-pricing perspective on inflation reveals that it depends on current and expected monetary and fiscal policies. There are three ways to carry $1 today into the future: money, bonds, and real assets. That dollar’s purchasing power varies inversely with the price level. Expected money… Read more
Short Volatility Strategies: Identification, Measurement, and Risk Management
Mark Anson and Ho Ho Volume 1, Number 2, Second Quarter 2003 Many investors demand position transparency from hedge fund managers in the belief that more information is better than less. However, certain hedge fund strategies create synthetic investment positions that resemble a short put option, and these positions are not revealed by position transparency… Read more
A Practical Framework for Portfolio Choice
Ricahrd O. Michaud Volume 1, Number 2, Second Quarter 2003 Traditional portfolio optimality criteria often have serious theoretical or practical limitations. A financial planning portfolio choice framework consisting of a resampled efficient portfolio set and geometric mean analysis is a practical alternative for many situations of investment interest. While Monte Carlo financial planning is a… Read more
Great Moments in Financial Economics: II. Modigliani-Miller Theorem
Mark Rubinstein Volume 1, Number 2, Second Quarter 2003 Franco Modigliani and Merton Miller are almost universally credited with the theorem that bears their name. In fact, the theorem was stated and proven 20 years earlier by John Burr Williams, to which he gave the name: “the Law of the Conservation of Investment Value.” However… Read more
INSIGHTS: Phase Shifts
Dean LeBaron Volume 1, Number 2, Second Quarter 2003 The physical world is composed of phase shifts, and we generally accept and understand the implications. The failure to recognize a phase shift that has taken place is exemplified by the perception of investment people about where they stand in the world … even what they… Read more
BOOK REVIEWS: All About Hedge Funds /Trading and Exchanges
Volume 1, Number 1, First Quarter 2003 All About Hedge Funds Robert A. Jaeger Reviewed by Mark Kritzman Trading and Exchanges Larry Harris Reviewed by Mark Kritzman View PDF… Read more