Richard O. Michaud, David N. Esch and Robert O. Michaud Volume 10, Number 4, Fourth Quarter 2012 The when-to-trade decision is a critical yet neglected component of modern asset management. Typical rebalancing rules are based on suboptimal heuristics. Rebalancing is necessarily a statistical similarity test between current and proposed optimal portfolios. Available tests ignore many… Read more
Articles
A New Perspective on the Validity of the CAPM: Still Alive and Well
Moshe Levy and Richard Roll Volume 10, Number 3, Third Quarter 2012 The Capital Asset Pricing Model (CAPM) has far-reaching practical implications for both investors and corporate managers. The model implies that the market portfolio is mean-variance efficient, and thus advocates passive investment. It also provides the most widely used measure of risk, beta, which… Read more
Estimating the Negative Impact of “Noise” on the Returns of Cap-Weighted Portfolios In Various Segments of the Equity Markets
Russell J. Fuller, Bing Han and Yining Tung Volume 10, Number 3, Third Quarter 2012 Capital Market Theory assumes that the ex ante market portfolio (which is cap-weighted) lies on the (ex ante) efficient frontier. However, we show that ex ante cap-weighted portfolios will always be interior portfolios relative to the end-of-investment-period ex post efficient… Read more
The Relative Strength of Industries versus Countries in Global Equity Markets
Jose Menchero and Andrei Morozov Volume 10, Number 3, Third Quarter 2012 The relative strength of industries versus countries is of great practical interest for global equity investors. In this article, we investigate the relative strength of these effects in the global equity markets over the sample period 1994-2010. In particular, we examine three market… Read more
How Does Your State Stack Up? Participation Costs in Higher Education Optional Retirement Plans
Daniel Bradley and Lei Wedge Volume 10, Number 3, Third Quarter 2012 We examine the costs to higher education employees investing in optional retirement plans (ORP). We find vast differences across states in terms of the number of providers, number of funds offered per provider, and fees. We find the same provider offering the same… Read more
Redemption Fees and the Risk-Adjusted Performance of International Equity Mutual Funds
Iuliana Ismailescu and Matthew Morey Volume 10, Number 3, Third Quarter 2012 In the wake of the market timing and late trading mutual fund scandals, many mutual funds adopted redemption fees to limit market timing. In this paper we investigate the impact of redemption fees on the risk-adjusted performance of U.S. based international equity funds… Read more
The Downside of High Water Marks: An Empirical Study
Sugata Ray Volume 10, Number 2, Second Quarter 2012 Using a large sample of hedge funds, I study the effects of the high water mark (HWM) on fund performance, risk, and fund closure. I find that as funds fall below the HWM, the standard deviation of future returns increases, the future expected Sharpe ratio decreases… Read more
Hedge-Fund Performance and Liquidity Risk
Ronnie Sadka Volume 10, Number 2, Second Quarter 2012 This paper demonstrates that liquidity risk as measured by the covariation of fund returns with unexpected changes in aggregate liquidity is an important predictor of hedge fund performance. The results show that funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6.5%… Read more
Asset Allocation Dynamics in the Hedge Fund Industry
Li Cai and Bing Liang Volume 10, Number 2, Second Quarter 2012 This paper examines asset allocation dynamics of hedge funds through conducting optimal change point test on an asset class factor model. Based on the average F-test and the Bayesian Information Criterion (BIC), we find that more dynamic hedge funds exhibit significantly better quality… Read more
Liquidity Shocks and Hedge Fund Contagion
Nicole M. Boyson, Christof W. Stahel and René M. Stulz Volume 10, Number 2, Second Quarter 2012 In Boyson, Stahel, and Stulz (2010), we investigate whether hedge funds experience worst return contagion that is, correlations in extremely poor returns that are over and above those expected from economic fundamentals. We find strong evidence of contagion… Read more