Vol. 16 No.4, 2018 Pengjie Gao, Paul Schultz and Zhaogang Song Investors can trade individual agency mortgage-backed securities (MBS) as specified pools (SPs), or trade them through TBA forward contracts. Sellers in the TBA market deliver the cheapest possible pool that fulfills the contracts, so they are traded on a cheapest to deliver basis. More… Read more
Articles
Time Aggregation of Sharpe Ratio A Better Extrapolation Rule
Vol. 16 No.4, 2018 Ziemowit Bednarek, Pratish Patel and Cyrus Ramezani The √T rule extrapolates a one-period Sharpe Ratio to T periods. But the rule ignores compounding. By considering compounding, Levy (1972) and others show that the Sharpe Ratio changes non-monotonically with horizon. We also theoretically and empirically show that the Sharpe Ratio term structure… Read more
Explaining the High P/E Ratios: The Message from the Gordon Model
Vol. 16 No.4, 2018 Heinz Zimmermann Are the high valuation levels of equity prices, after controlling for the low interest rate level, driven by irrational exuberance and excessive growth expectations? The Gordon model helps for a consistent interpretation of commonly used valuation ratios. Overall, P/E ratios do not seem to be caused by irrational growth… Read more
Macro-Based Parametric Asset Allocation
Vol. 16, No.3, 2018 Richard Franz Without doubt the financial returns of asset classes are interlinked with the economy. However, a direct link between financial returns and return-driving forces has not been discovered yet. Moreover, there exist many robust approaches for within-asset-class allocation but few advances have been made for between-asset-class allocation. To address these… Read more
Picking Through the Alpha Graveyard Correcting for Survivorship Bias in Investment Product Universes
Vol. 16, No.3, 2018 Gregory C. Allen, Ivan S. Cliff and Walter J. Meerschaert The authors propose a practical technique to correct for survivorship bias across return distributions for investment product universes. The technique is designed to work efficiently in a large-scale performance measurement environment. It uses all available data for survivors and non-survivors, corrects for bias across… Read more
Defined Contribution Pension Plans and Mutual Fund Flows
Vol. 16, No.3, 2018 Clemens Sialm, Laura Starks and Hanjiang Zhang Defined contribution (DC) pension plans constitute an important component of mutual fund assets. Flows into DC plans depend on the decisions of plan sponsors and plan participants: The sponsors select the investment menus made available to employees and the participants decide how to allocate… Read more
A New Approach to Goals-Based Wealth Management
Vol. 16, No.3, 2018 Sanjiv R. Das, Daniel Ostrov, Anand Radhakrishnan and Deep Srivastav We introduce a novel framework for goals-based wealth management (GBWM), where risk is understood as the probability of investors not attaining their goals, not just the standard deviation of investor’s portfolios. Our framework is based on a foundation of developments in… Read more
The Dirty Dozen of Valuation Ratios: Is One Better Than Another?
Vol. 16, No. 2, 2018 Eero Pätäri, Ville Karell, Pasi Luukka and Julian Scott Yeomans This paper compares the efficacy of both traditional valuation ratios and an extensive set of related combination criteria in identifying the future best-performing stocks for a comprehensive U.S. sample over the period 1971–2013. Value portfolios formed on different criteria have… Read more
Evaluation and Ranking of Market Forecasters
Vol. 16, No. 2, 2018 David H. Bailey, Jonathan M. Borwein, Amir Salehipour and Marcos López de Prado Many investors rely on market experts and forecasters when making investment decisions, such as when to buy or sell securities. Ranking and grading market forecasters provides investors with metrics on which they may choose forecasters with the… Read more
Common Factors in Corporate Bond Returns
Vol. 16, No. 2, 2018 Ronen Israel, Diogo Palhares and Scott Richardson We find that four well-known characteristics (carry, defensive, momentum, and value) explain a significant portion of the cross-sectional variation in corporate bond excess returns. These characteristics have positive risk-adjusted expected returns and are not subsumed by traditional market premia or respective equity anomalies… Read more