Harry M. Markowitz Volume 4, Number 3, Third Quarter 2006 In 1940, in the context of choosing optimum reinsurance levels, Bruno de Finetti essentially proposed mean-variance analysis with correlated risks. It was not until 1952 that Markowitz and Roy introduced mean-variance analysis with correlated risks into the financial literature. De Finetti solved the problem of… Read more
Articles
Bruno de Finetti and Mean-Variance Portfolio Selection
Mark Rubinstein Volume 4, Number 3, Third Quarter 2006 Bruno de Finetti is generally regarded as the finest Italian mathematician of the 20th century. Among his many achievements, economists are familiar with his work on the axiomatization of subjective probability. To the surprise of many, a treasure-trove of other results in economics has recently come… Read more
Are the Probabilities Right? Dependent Defaults and the Number of Observations Required to Test for Default Rate Accuracy
Roger M. Stein Volume 4, Number 2, Second Quarter 2006 Users of default prediction models often desire to know how accurate the estimated probabilities are. There are a number of mechanisms for testing this, but one that has found favor due to its intuitive appeal is the examination of goodness of fit between expected and… Read more
How Do IPO Issuers Pay for Analyst Coverage?
Michael T. Cliff and David J. Denis Volume 4, Number 2, Second Quarter 2006 This article reports evidence consistent with the view that initial public offering (IPO) issuers purchase high-quality analyst coverage with greater underpricing of the IPO. Specifically, we report that underpricing is positively related to analyst coverage by the lead underwriter and to… Read more
Employee Stock Options and Taxes
Courtney H. Edwards, John R. Graham, Mark H. Lang and Douglas A. Shackelford Volume 4, Number 2, Second Quarter 2006 In this paper, we investigate the effect of stock options on the tax position of the firm. We argue that option tax deductions can significantly affect a firm’s marginal tax rate and that the effect… Read more
S&P 500 Index Changes and Investor Awareness
Honghui Chen, Gregory Noronha and Vijay Singal Volume 4, Number 2, Second Quarter 2006 We find that, on average, firms added to the S&P 500 index experience a permanent price increase, while those deleted from it suffer only a temporary price decline. Existing theories, such as a downward sloping demand curve, liquidity, and information, fail… Read more
A Dynamic Model of Portfolio Management
Richard Grinold Volume 4, Number 2, Second Quarter 2006 This paper presents a simplified model of dynamic active portfolio management. It is designed to answer questions about product design and provide a guide to better implementation. The model has four inputs: an information ratio that measures the anticipated ability to add value, a risk aversion… Read more
Great Moments in Financial Economics: IV. The Fundamental Theorem (Part II)
Mark Rubinstein Volume 4, Number 1, First Quarter 2006 This is Part II of the fourth in a series of articles in this Journal examining the historical origins of key ideas in the history of financial economics. It describes an extension of the “fundamental theorem” from buy-and-hold strategies developed in Part I to dynamic portfolio… Read more
Can Contrarian Strategies Improve Momentum Profits
Kalok Chan and Hung Wan Kot Volume 4, Number 1, First Quarter 2006 This paper investigates whether investors can exploit the contrarian cycle to improve the profitability of momentum strategies. We conjecture that the momentum strategies implemented in the early stage of price reversal (MSES) are more profitable than those implemented in the late stage… Read more
Mutual Fund Dilution from Market Timing Trades
Jason T. Greene and Conrad S. Ciccotello Volume 4, Number 1, First Quarter 2006 This paper introduces a model to measure the dilution impact on an open-end fund due to market timing trades. When a timer buys shares of a fund just prior to positive returns, the extra cash in the fund dilutes the fund’s… Read more