Harry Markowitz, Robert Snigaroff and David Wroblewski Volume 9, Number 1, First Quarter 2011 This paper analyzes the supply and demand for alpha by institutional investors and the money managers who serve them. A large database of products offered by such managers is used to estimate how the demand for such products increases as a… Read more
Articles
Decentralized Downside Risk Management
Andrea Reed, Cristian Tiu and Uzi Yoeli Volume 9, Number 1, First Quarter 2011 The process of risk management for institutional investors faces two challenges. First, since most institutions are decentralized in contrast to being direct investors in assets, it is difficult to separate the risks of the assets in the portfolio from the risks… Read more
What’s the Best Way to Trade Using the January Barometer?
Michael J. Cooper, John J. McConnell and Alexei V. Ovtchinnikov Volume 8, Number 4, Fourth Quarter 2010 According to Streetlore, as embedded in the adage “As goes January so goes the rest of the year,” the market return in January provides useful information to would-be investors in that the January market return predicts the market… Read more
The Rule of 72 for Lifetime Savings
Thomas K. Philips Volume 8, Number 4, Fourth Quarter 2010 Financial planners often impress upon their clients the power of compounding by quoting them the Rule of 72: With annual compounding, a dollar invested in an investment account at a constant interest rate of r% per annum grows to two dollars in approximately 72/r years… Read more
How Quickly Do Equity Prices Converge to Intrinsic Value?
Dennis R. Capozza and Ryan D. Israelsen Volume 8, Number 4, Fourth Quarter 2010 This research hypothesizes that in markets where information costs, transactions costs and the economic impact of information can vary widely, we should expect both significant predictability and systematic variation in the predictability. Controlling for other factors, we find that on average… Read more
Equally Weighted Rebalancing as the Average of all Investment Strategies
Masahito Shimizu Volume 8, Number 4, Fourth Quarter 2010 In a performance evaluation, it is important for both sponsors and portfolio managers to estimate the opportunity set of possible performances. In this regard, we investigate the average performance of all possible strategies and how performance varies across strategies. We show that the average is equal… Read more
An Improved Implied Copula Model and Its Application to the Valuation of Bespoke CDO Tranches
John Hull and Alan White Volume 8, Number 3, Third Quarter 2010 In Hull and White (2006) we showed how CDO quotes can be used to imply a probability distribution for the hazard rate over the life of the CDO. This is known as the implied copula model. In this paper we develop a parametric… Read more
Do Informed Investors Cause Momentum?
James H. Scott and Jorge A. Murillo Volume 8, Number 3, Third Quarter 2010 We show that there will be expected momentum in stock returns if there are informed and uninformed investors, and if informed investors know the mean of the stocks future fundamental value. We use analysts estimates to construct a truncated valuation formula… Read more
A Bayesian Approach to Stress Testing and Scenario Analysis
Riccardo Rebonato Volume 8, Number 3, Third Quarter 2010 I present a new approach to stress testing that combines the elicitation of subjective (marginal or conditional) probabilities of events with the specification of a simple causal structure among them. By so doing, stress events are placed in an approximate but coherent probabilistic framework. The approach… Read more
The Asset Growth Effect in Stock Returns
Michael J. Cooper, Huseyin Gulen and Michael J. Schill Volume 8, Number 3, Third Quarter 2010 We document a strong negative relationship between the growth of total firm assets and subsequent firm stock returns using a broad sample of U.S. stocks. Over the past 40 years, low asset growth stocks have maintained a return premium… Read more