Ricahrd O. Michaud Volume 1, Number 2, Second Quarter 2003 Traditional portfolio optimality criteria often have serious theoretical or practical limitations. A financial planning portfolio choice framework consisting of a resampled efficient portfolio set and geometric mean analysis is a practical alternative for many situations of investment interest. While Monte Carlo financial planning is a… Read more
Articles
Great Moments in Financial Economics: II. Modigliani-Miller Theorem
Mark Rubinstein Volume 1, Number 2, Second Quarter 2003 Franco Modigliani and Merton Miller are almost universally credited with the theorem that bears their name. In fact, the theorem was stated and proven 20 years earlier by John Burr Williams, to which he gave the name: “the Law of the Conservation of Investment Value.” However… Read more
Private Equity Returns: An Empirical Examination Of The Exit of Venture-Backed Companies
Sanjiv R. Das, Murali Jagannathan, and Atulya SarinIn this paper we examine 52,322 financing rounds in 23,208 unique firms, over the period 1980 through 2000 by venture and buyouts funds and estimate the probability of exit, time to exit, exit multiples and the expected gains from private equity investments. The expected multiple (after accounting for… Read more
Segmentation, Illiquidity, and Returns
Renato Staub and Jeffrey Diermeier Volume 1, Number 1, First Quarter 2003 When investing in alternative assets, such as private equity or natural resources – which may be “locked-up” for prolonged periods of time – the question of compensation for illiquidity becomes important. No rational investor will choose the illiquid over the liquid asset unless… Read more
Understanding Mutual Funds and Hedge Funds Styles Using Return-Based Style Analysis
Arik Ben Dor, Ravi Jagannathan, and Iwan Meier Volume 1, Number 1, First Quarter 2003 We illustrate the use of return-based style analysis in practice using several examples. We demonstrate the importance of selecting the right style benchmarks and how the use of inappropriate style benchmarks may lead to wrong conclusions. We show how asset… Read more
It’s 11PM – Do You Know Where Your Liquidity Is? The Mean-Variance Liquidity Frontier
Andrew W. Lo, Constantin Petrov, and Martin Wierzbicki Volume 1, Number 1, First Quarter 2003 We introduce liquidity into a mean-variance portfolio optimization framework by defining several measures of liquidity and then constructing three-dimensional mean-variance-liquidity frontiers in three ways – liquidity filtering, liquidity constraints, and a mean-variance-liquidity objective function. We show that portfolios close to… Read more
Great Moments in Financial Economics: I. Present Value
Mark Rubinstein Volume 1, Number 1, First Quarter 2003 This is the first in a series of articles to appear in this Journal on the history of significant ideas in financial economics. Perhaps the most basic of these is the idea of present value. Early contributors include Johan de Witt (1671), the famous mathematician Abraham… Read more
A Theory of Inflation
Jack L. Treynor Volume 1, Number 1, First Quarter 2003 Inflation entails a loop running from prices to wages and back again from wages to prices. Change in inflation rates result from two types of intervention in that otherwise closed loop. Inflation surprise intervenes when the labor productivity of the marginal plant, hence the real… Read more
Estimating Default Probabilities Implicit in Equity Prices
Tibor Janosi, Robert Jarrow, and Yildiray Yildirim This paper uses a reduced form credit risk model to estimate default probabilities implicit in equity prices. For a cross-section of firms, a time-series regression of monthly equity returns is estimated. We show that it is feasible to infer the firm’s probability of default implicit in equity returns… Read more