Alexander D. Healy and Andrew W. Lo Volume 7, Number 3, Third Quarter 2009 In response to the current financial crisis, a number of hedge funds have implemented gates on their funds that restrict withdrawals when the sum of redemption requests exceeds a certain percentage of the funds total assets. To reduce the investors risk… Read more
Articles
Valuation of Credit Contingent Claims: An Arbitrage-Free Credit Model
Thomas S. Y. Ho and Sang Bin Lee Volume 7, Number 3, Third Quarter 2009 This study extends the generalized Ho-Lee model to the credit derivative swap (CDS) curve movements that ensures the hazard rate movement is arbitrage-free for any given CDS curve. This study shows that the generalized Ho-Lee model is not limited to… Read more
The Value Spread as a Market Timing Signal: Evidence from Asia
Charles E. Hyde and Michael P. Triguboff Volume 7, Number 2, Second Quarter 2009 Using monthly data from 1992-2006, we show the value premium in Asia ex Japan is positively related to the cross-sectional dispersion of four common value ratios. The book-to-price and cash flow-to-price spreads exhibit the strongest relationship. Typical month-to-month variation in these… Read more
A Simple Model for Time-Varying Expected Returns on the S&P 500 Index
James S. Doran, Ehud I. Ronn and Robert S. Goldberg Volume 7, Number 2, Second Quarter 2009 This paper presents a parsimonious, implementable model for the estimation of the short and long-term expected rates of return on the S&P 500 stock market Index. Sufficient statistics for the expected return on the S&P 500 Index consist… Read more
A Structural Analysis of the Default Swap Market – Part II (Relative Value)
Lisa Goldberg, Rajnish Kamat and Jason Kremer Volume 7, Number 2, Second Quarter 2009 We evaluate several long/short strategies for managing a portfolio of default swaps. The strategies are based on a ranking of credits by residuals, which are the differences between market spreads and spreads generated by the iSpread structural model. Investment grade portfolios… Read more
Liquidity Risk and Limited Arbitrage: Are Taxpayers Helping Hedge Funds Get Rich?
Evan Gatev Volume 7, Number 2, Second Quarter 2009 Hedge funds facing capital constraints during market-wide liquidity shocks use bank credit lines to reduce the limits to arbitrage. During shocks, government-protected bank deposits receive inflows and this exclusive low cost funding enables banks to lend to hedge funds. In effect, banks compete away the government… Read more
Optimal Rebalancing: A Scalable Solution
Mark Kritzman, Simon Myrgren and Sébastien Page Volume 7, Number 1, First Quarter 2009 Institutional investors usually employ mean-variance analysis to determine optimal portfolio weights. Almost immediately upon implementation, however, the portfolio’s weights become sub-optimal as changes in asset prices cause the portfolio to drift away from the optimal targets. We apply a quadratic heuristic… Read more
Shorting Demand and Predictability of Returns
Lauren Cohen, Karl B. Diether and Christopher J. Malloy Volume 7, Number 1, First Quarter 2009 We examine the link between shorting and future returns in the equities market using a proprietary dataset of stock loan fees and quantities. We find that separating supply and demand shifts provides a richer view of the information contained… Read more
The Clustering of Extreme Movements: Stock Prices and the Weather
Atanu Saha, Burton G. Malkiel and Alex Grecu Volume 7, Number 1, First Quarter 2009 One striking feature of the United States stock market is the tendency of days with very large movements of stock prices to be clustered together. We define an extreme movement in stock prices as one that can be characterized as… Read more
Measuring the Risk of Large Losses
Kay Giesecke, Thorsten Schmidt and Stefan Weber Volume 6, Number 4, Fourth Quarter 2008 Risk management is an important component of the investment process. It requires quantitative measures of risk that provide a metric for the comparison of financial positions. In this expository note we give an overview of risk measures. In particular, we contrast… Read more