Jason C. Hsu, Hideaki Kudoh and Toru Yamada Volume 11, Number 2, Second Quarter 2013 Using a global equity dataset that includes emerging markets, we confirm that high-volatility stocks tend to deliver low average returns; this effect is robust to adjustments for country and style factors. We also show that sell-side analysts earnings growth forecasts… Read more
Articles
Price Inflation and Wealth Transfer During the 2008 SEC Short-Sale Ban
Lawrence E. Harris, Ethan Namvar and Blake Phillips We estimate that the ban on short-selling financial stocks imposed by the SEC in September 2008 led to price inflation of 10-12% in the banned stocks based on a factor-analytic model that extracts common valuation information from the prices of stocks that were not banned. This inflation… Read more
Put Option Exercise and Short Stock Interest Arbitrage
Kathryn Barraclough and Robert E. Whaley Volume 11, Number 1, First Quarter 2013 U.S. exchange-traded stock options are exercisable before expiration. While put options should frequently be exercised early to earn interest, they are not. In this paper, we explain an early exercise decision rule and then examine actual exercise behavior during the period January… Read more
VarGamma: A Unified Measure of Portfolio Risk
Kent Osband Volume 11, Number 1, First Quarter 2013 Most portfolio risk analysis implicitly assumes that risks are stable, despite copious evidence of instability. This article presents an alternative, VarGamma, that provides neat formulas for certainty equivalents (risk-adjusted returns) even with stochastic volatility and volatility-dependent drift. VarGamma measures are far more flexible and robust than… Read more
Stock Strategies with the January Barometer and the Yield Curve
Licheng Sun, Chris Stivers and Ajay Kongera Volume 11, Number 1, First Quarter 2013 The January Barometer states that the sign of the stock-markets returns in January can predict the subsequent 11-month stock-market return over February to December. Cooper et al. (2010) show that the best way to use the January Barometer is to be… Read more
Investing in What You Know: The Case of Individual Investors and Local Stocks
Mark S. Seasholes and Ning Zhu Volume 11, Number 1, First Quarter 2013 This paper tests the performance of individuals’ equity investments. We study over 40,000 accounts and 950,000 trades from a large discount broker. Individuals invest heavily in local stocks and put 14% more into these stocks than a market-neutral portfolio would suggest. Using… Read more
Was the Writing on the Wall? An Options Analysis of the 2008 Lehman Brothers Crisis
Zhirong Chen and Wai Mun Fong Volume 10, Number 4, Fourth Quarter 2012 This paper uses risk neutral densities (RNDs) of stock options to investigate the markets perceptions of crash risk in the recent U.S. subprime crisis. RNDs were estimated using the double lognormal method for the S&P 500 market index, Lehman Brothers, Merrill Lynch… Read more
The Role of Stress Testing in Credit Risk Management
Roger M. Stein Volume 10, Number 4, Fourth Quarter 2012 In this article, we outline some concepts relating to the use of stress testing in credit risk management. We begin by providing a simple taxonomy of stress scenarios and discussing the trade-offs that different approaches require for implementation. Our taxonomy is modeled after one that… Read more
The Controversy in Fundamental Indexation: Why Both Sides of the Argument are (Mostly) Correct
Michael Dempsey Volume 10, Number 4, Fourth Quarter 2012 We examine the contribution of noise to the theoretical underpinnings of Fundamental Indexation (FI). Although we argue that market capital-weighted indexes do not incur a structural drag due to noise as claimed by the proponents of FI, we conclude, nevertheless, that noise as advanced by FI… Read more
Coherent Asset Allocation and Diversification in the Presence of Stress Events
Riccardo Rebonato and Alexander Denev Volume 10, Number 4, Fourth Quarter 2012 We propose a method to integrate frequentist and subjective probabilities in order to obtain a coherent asset allocation in the presence of stress events. Our working assumption is that in normal market asset returns are sufficiently regular for frequentist statistical techniques to identify… Read more