Volume 15, Number 2, Second Quarter 2017 View PDF… Read more
Archives
Leaning with the Wind: Long-Term Asset Owners and Procyclical Investing
Volume 15, Number 2, 2017 Bradley A. Jones This paper seeks to shed light on the systematic investment patterns of long-term asset owners. Based on a sample of representative portfolios (totaling $24 trillion) for global central banks, U.S. public and private pension funds, U.S. insurers and U.S. endowment funds, four main findings are established. First… Read more
Horizon Effects that are Larger than You Think: Dynamic Allocation
Volume 15, Number 2, 2017 Thomas J. O’Brien This paper illustrates optimal dynamic allocation in a traditional two-fund capital market model. As in previous literature, a mean-reverting market portfolio implies a “horizon effect” in typical investors’ allocations. For investors whose risk aversion is higher than the representative investor’s, the horizon effect becomes substantially larger in… Read more
A Pitfall in Ethical Investing: ESG Disclosures Reflect Vulnerabilities, not Virtues
Volume 15, Number 2, 2017 Gerald T. Garvey, Joshua Kazdin, Ryan LaFond, Joanna Nash and Hussein Safa It is widely believed that ESG (Environmental, Social, Governance) investing reduces regulatory and reputational risks. In a large global panel, we find that business ethics controversies and regulatory issues are more likely for firms that disclose a richer… Read more
Rethinking the Fundamental Law of Active Management
Volume 15, Number 2, 2017 Jose Menchero The fundamental law of active management provides a powerful framework for analyzing portfolio diversification and risk-adjusted returns. It states that the information ratio of an unconstrained optimal portfolio is given by the product of the information coefficient (a measure of skill) and the square root of breadth, where… Read more
The Impact of Different Default Triggers on CMBS Risk Evaluation
Volume 15, Number 2, 2017 Andreas D. Christopoulos This paper presents a structural generalization for pricing commercial mortgage backed securities (CMBS) and their derivatives, CMBX. I compare results for the structural generalization with a reduced-form approach using identical data sets and analyses. My comparisons are made at both the loan and bond levels and cover… Read more
Practitioner’s Digest
Volume 15, Number 1, First Quarter 2017 View PDF>… Read more
Traded Funds and the New Dynamics of Investing
Volume 15, No. 1, 2017 Traded Funds and the New Dynamics of Investing by Ananth Madhavan (Reviewed by Ben Eischen) View PDF… Read more
The Revolving Door
Volume 15, No. 1, 2017 Craig W. French View PDF… Read more
Stock Portfolio Design and Backtest Overfitting
Volume 15, No. 1, 2017 David H. Bailey, Jonathan M. Borwein and Marcos López de Prado In mathematical finance, backtest overfitting connotes the usage of historical market data to develop an investment strategy, where too many variations of the strategy are tried, relative to the amount of data available. Backtest overfitting is now thought to… Read more
Picking “Winners” Funds
Volume 15, No. 1, 2017 Joshua Livnat, Gavin Smith and Martin Tarlie One of the most crucial decisions for investors and plan sponsors is the selection of funds among the thousands of available alternatives.We find that regardless of the initial criterion used to rank funds based on past performance, more diversified top funds outperform concentrated… Read more
A Machine Learning Approach to Research Curation for Investment Process
Volume 15, No. 1, 2017 Sonya Cates, Stephen Lawrence, Carla Penedo and Viktoriia Samatova Many investment professionals consider academic research instrumental in improving the quality of the investment process. However, it is hard to extract investment insights from the vast and rapidly expanding research corpus, which requires a large amount of time and human effort… Read more
Moore’s Law Vs. Murphy’s Law in the Financial System: Who’s Winning?
Volume 15, No. 1, 2017 Andrew W. Lo Breakthroughs in computing hardware, software, telecommunications, and data analytics have transformed the financial industry, enabling a host of new products and services such as automated trading algorithms, crypto-currencies, mobile banking, crowdfunding, and robo-advisors. However, the unintended consequences of technology-leveraged finance include firesales, flash crashes, botched initial public… Read more
Insights – Automated Investment Services
Volume 15, No. 1, 2017 Burton G. Malkiel Fully automated investment services provide automated investment management. Selected portfolios are low-cost and are rebalanced, tax managed and optimized, consistent with an investor’s goals and risk tolerance. Everything, including deposits, withdrawals, transfers, and reporting, is handled electronically. The substantial advantages made available by technology are enumerated. … Read more
Can Fundamental Factors Enhance the Performance of Traditional Momentum Strategies?
Volume 14, Number 4, 2016 Susana Yu and Gwendolyn Webb We test whether price-based momentum strategies can be improved by additional screening based on fundamental measures. Within the framework of portfolio formation based on recent winning or losing stocks, we further screen on the basis of fundamental measures of financial strength and gross profitability. Our… Read more
A New Look at Discount Returns: Implications for the Global Investor
Volume 14, Number 4, 2016 Anthony Tessitore and Nilufer Usmen This paper examines risk–return characteristics of discount returns on portfolios of closed end funds and how they might benefit investors. Discount return is defined as the percentage change in discounts over a period. This paper focuses on the distribution of discount returns conditioned on discount… Read more
The Road Not Taken
Volume 14, Number 4, 2016 Craig French… Read more
PRACTITIONER’S DIGEST
Volume 14, Number 4, Fourth Quarter 2016 View PDF… Read more
The Economics of Flash Orders and Trading
Lawrence E. Harris and Ethan Namvar Volume 14, Number 4, 2016 View PDF… Read more
Book Review – God’s Own Arithmetic: Harry Markowitz’ Risk-Return Analysis
BOOK REVIEW God’s Own Arithmetic: Harry Markowitz’ Risk-Return Analysis Reviewed by Craig W. French Volume 14, Number 4, Fourth Quarter 2016 View PDF… Read more
Business Models to Cure Rare Disease: A Case Study of Solid Biosciences
Esther S. Kim and Andrew W. Lo Volume 14, Number 4 , Four Quarter 2016 View PDF… Read more
After-Tax Portfolio Value: The Missing Tax Option
Andrew Kalotay Volume 14, Number 4, 2016 After-tax performance measurement requires a rigorous definition of after-tax portfolio value, which is also a prerequisite for effective portfolio management. The focus of this paper is the tax option, which is the right to execute tax-beneficial transactions. This option is a critical component of after-tax portfolio value. Some… Read more
Mass Customization Versus Mass Production – How an Industrial Revolution is About to Take Place in Money Management and Why it Involves a Shift From Investment Products to Investment Solutions
Volume 14, Number 3, Third Quarter 2016 Lionel Martellini While mass production has happened a long time ago in investment management through the introduction of mutual funds and more recently exchange traded funds, a new industrial revolution is currently under way, which involves mass customization, a production and distribution technique that will allow individual investors… Read more
Correlation or Causation?: The Sorry State of Inference in Empirical Modeling
Volume 14, Number 3, 2016 Xiaojing Dong and John Heineke For decades, statistical methods, many based upon the “general linear model,” have been used to do estimation and test hypotheses in the social and natural sciences, in medicine, and in the private sector. These tools have become increasingly sophisticated and are often paired with powerful… Read more
Case Study – Developing Countries
Case Study Volume 14, Number 3 , Third Quarter 2016 View PDF… Read more