Mark Kritzman The future of finance is bright, if for no other reason, because our financial system failed. This failure raises the level of urgency for developing more realistic models, more effective regulation, and more responsible financial institutions, and it permits us to start with a clean slate… Read more
Articles
Non-Normality Facts and Fallacies
David N. Esch Volume 8, Number 1, First Quarter 2010 Recently there has been an increasing trend in the quantitative finance community to call for statistical models which are explicitly model returns with non-normal probability distributions (e.g. Sheikh and Qiao, 2009, Bhansali, 2008, Harvey and Siddique, 2004). In this paper, we explain why summary rejection… Read more
New Directions in Financial Sector and Sovereign Risk Management
Dale Gray and Andreas A. Jobst Volume 8, Number 1, First Quarter 2010 The global financial crisis that began in 2007 has forced a re-examination of macroeconomics, financial economics, regulation, and risk management. Traditional macroeconomics overlooks the importance of risk which makes it ill-suited to analyze risk transmission, contagion and how risks can build up… Read more
Do Endowment Funds Select the Optimal Mix of Active and Passive Risks?
Keith C. Brown and Cristian Tiu Volume 8, Number 1, First Quarter 2010 The investment decision confronting managers of multi-asset class portfolios can be characterized in terms of the passive (i.e., benchmark or policy) and active (i.e., market timing and security selection) strategies they adopt. In this paper, we investigate whether managers select the appropriate… Read more
The Long View of Financial Risk
Lisa R. Goldberg and Michael Y. Hayes Volume 8, Number 1, First Quarter 2010 We discuss a practical and effective extension of portfolio risk management and construction best practices to account for extreme events. The central element of the extension is (expected) shortfall, which is the expected loss given that a value-at-risk limit is breached… Read more
Striking Regulatory Irons While Hot
Hersh Shefrin and Meir Statman Volume 7, Number 4, Fourth Quarter 2009 We are in the midst of what might end up as the most significant change to financial regulations since the Great Depression. This is because the financial and economic crisis that continues to engulf us is the most severe crisis since the Great… Read more
The Dynamics of Leveraged and Inverse Exchange-Traded Funds
Minder Cheng and Ananth Madhavan Volume 7, Number 4, Fourth Quarter 2009 Leveraged and inverse Exchange-Traded Funds (ETFs) have attracted significant assets lately. Unlike traditional ETFs, these funds have leverage explicitly embedded as part of their product design. While these funds are primarily used by short-term traders, they are gaining popularity with individual investors placing… Read more
The Risk That Risk Will Change
Robert F. Engle Volume 7, Number 4, Fourth Quarter 2009 Standard approaches to risk management focus on short run risks, yet many positions are held for longer periods. Over such holding periods there is a risk that risks will change. In this note several easily implemented approaches to estimating the term structure of risk are… Read more
Which Explains an Equity Index’s Return Better, the Change in Its Own Implied Volatility or That for a Broader Index?
Susana Yu and Dean Leistikow Volume 7, Number 3, Third Quarter 2009 This paper examines the proper risk proxy for an equity index. For each of nine indexes, an implied volatility index (VI) is computed from its options. For each, it determines whether the indexes return is explained better by the contemporaneous change in its… Read more
The 4% Rule At What Price?
Jason S. Scott, William F. Sharpe and John G. Watson Volume 7, Number 3, Third Quarter 2009 The 4% rule is the advice many retirees follow for managing spending and investing. We examine this rules inefficiencies – the price paid for funding its unspent surpluses and the overpayments made to purchase its spending policy. We… Read more