Volume 13, Number 1, First Quarter 2015 John Hull and Alan White Before 2007, derivatives practitioners used a zero curve that was bootstrapped from LIBOR swap rates to provide “risk-free” rates when pricing derivatives. In the last few years, when pricing fully collateralized transactions, practitioners have switched to using a zero curve bootstrapped from overnight… Read more
Articles
Reserve Primary: Fools Rush in Where Wise Men Fear to Tread!
Volume 13, Number 1, First Quarter 2015 Ozgur (Ozzy) Akay, Mark D. Griffiths and Drew B. Winters This is a clinical analysis of the demise of the Reserve Primary Fund, the first ever money market fund. Reserve Primary was caught in a perfect storm of its own making when the financial markets went into a… Read more
The Dependence of Upside Capture Ratios and Downside Capture Ratios on the Length of the Measurement Interval, Beta, and Alpha
Robert Ferguson, Danny Meidan and Joel Rentzler Volume 12, Number 4, Fourth Quarter 2014 Upside and downside capture ratios are used to assess the quality of investment managers and investment strategies. We propose a simple theoretical model which predicts that the upside capture ratio is an increasing function of the measurement interval length and that… Read more
Separating Winners From Losers Among Value and Growth Stocks in Different US Exchanges: 1969-2011
George Athanassakos Volume 12, Number 4, Fourth Quarter 2014 The purpose of this paper is twofold: (a) to determine whether there is value premium in our sample of US stocks for the period May 1, 1969–April 30, 2011; and (b) to examine whether an additional screening to the first step of the value investing process… Read more
A Simple Diversified Portfolio Strategy
Bernd Hanke and Garrett Quigley Volume 12, Number 4, Fourth Quarter 2014 We present a simple portfolio construction approach which is a blend of market weights and equal stock and sector weights. Our approach results in a highly diversified portfolio both on a stock level and on a sector level and generates higher portfolio returns… Read more
For Better Performance: Constrain Portfolio Weights Differentially and Globally
Haim Levy and Moshe Levy Volume 12, Number 4, Fourth Quarter 2014 Even after more than six decades since the publication of the breakthrough article by Markowitz, the Mean–Variance framework is still the most commonly employed portfolio management tool. Yet, as portfolio managers know all too well, the optimal diversification and the induced performance are… Read more
Large Price Changes and Subsequent Returns
Suresh Govindaraj, Joshua Livnat, Pavel G. Savor and Chen Zhao Volume 12, Number 3, Third Quarter 2014 We investigate whether large stock price changes are associated with short-term reversals or momentum, conditional on the issuance of analyst price target or earnings forecast revisions immediately following these price changes. Our study provides evidence that prices of… Read more
Dilution of Sector Exposures: When Does Unintended Indexing Happen?
Michael Stein and Svetlozar T. Rachev Volume 12, Number 3, Third Quarter 2014 We analyze how the inclusion of several sectors in a portfolio leads to a countering of exposures and to a replication of the index. Using a weight-based measure, we find that on a composition level unintended indexing appears to happen with only… Read more
Corporate Credit Limits for Fixed Income Portfolios
Miikka Taurén and Thomas Philips Volume 12, Number 3, Third Quarter 2014 Fixed income portfolio managers and risk managers constantly grapple with the question of how to size their corporate credit trades. Their task is made more difficult by the fact that corporate credit events are rare, particularly among Investment Grade bonds, and that tail… Read more
Does Factor Timing Explain Hedge Fund Alpha?
Hyuna Park Volume 12, Number 2, Second Quarter 2014 This paper empirically decomposes hedge fund excess return into factor timing, security selection, and risk premium. Portfolio-level tests show that security selection explains most of the excess return generated by hedge funds during 1994–2009, and the contribution of factor timing is small. Fund-level tests find significant… Read more