Volume 15, No. 1, 2017 Andrew W. Lo Breakthroughs in computing hardware, software, telecommunications, and data analytics have transformed the financial industry, enabling a host of new products and services such as automated trading algorithms, crypto-currencies, mobile banking, crowdfunding, and robo-advisors. However, the unintended consequences of technology-leveraged finance include firesales, flash crashes, botched initial public… Read more
Articles
Equity Indices’ Returns: Contingent Claims on GDP Stochastic Movements
Volume 13, Number 2, Second Quarter 2015 Thomas S.Y. Ho and Sang Bin Lee This paper proposes an equity index contingent claim model. The model assumes that the equity broad-based market indices’stochastic movements are contingent to macroeconomic risk factors that are derived from Ho et al.’s (HPS, 2012, 2013) and Ho and Lee’s (HL, 2015b… Read more
Growth Optimal Portfolio Insurance for Long-Term Investors
Volume 13, No. 2, Second Quarter, 2015 Daniel Mantilla-García We solve the growth-rate optimal multiplier of a portfolio insurance strategy in the general case with a locally risky reserve asset and stochastic state variables. The level of the optimal time-varying multiplier turns out to be lower than the standard constant multiplier of Constant Proportion Portfolio… Read more
Strategic Asset Allocation with Low-Risk Stocks: A Bootstrap Analysis
Volume 13, Number 2, Second Quarter 2015 Wai Mun Fong and Timothy Koh Traditional asset allocations such as the 60/40 portfolio of stocks/bonds are not as well diversified as many investors believe since almost all the portfolio’s returns are driven by the stock component. This paper examines a novel approach to strategic allocation by combining… Read more
A Structural Macro-Financial Model an Macro-Risk Management
Volume 13, Number 2, Second Quarter 2015 Wei Chen, Mark Kritzman and David Turkington Informed investors understand that they should hedge at least some of their portfolios’currency exposure, but the best strategy for doing so remains an open question. We investigate a variety of currency hedging strategies, including linear strategies, non-linear strategies, and combinations thereof… Read more
Alternative Currency Hedging Strategies With Known Covariances
Volume 13, Number 2, Second Quarter 2015 Wei Chen, Mark Kritzman and David Turkington Informed investors understand that they should hedge at least some of their portfolios’currency exposure, but the best strategy for doing so remains an open question. We investigate a variety of currency hedging strategies, including linear strategies, non-linear strategies, and combinations thereof… Read more
What Piketty Doesn’t Understand
Volume 13, Number 2, Second Quarter 2015 Jack Treynor… Read more
The Value of Active Investing
Volume 13, Number 3, Third Quarter 2015 Craig French We examine whether the value of active investment management can exceed its cost, and find that it can, by a substantial margin. We consider the 0.67% average cost estimate in French (2008), comparing it with the expected value of a known active investment strategy. For a… Read more
Beware Children Trading
Volume 13, Number 3, 2015 Henk Berkman, Paul D. Koch and P. Joakim Westerholm Guardians behind underaged accounts are successful at picking stocks. These informed traders tend to channel their best trades through the accounts of children, especially when they trade just before major earnings announcements, large price changes, and takeover announcements. Building on these… Read more
Augmented Risk Models to Mitigate Factor Alignment Problems
Volume 13, Number 3, (2015) Anureet Saxena and Robert A. Stubbs Construction of optimized portfolios entails a complex interaction between three key entities, namely, the risk factors, the alpha factors and the constraints. The problems that arise due to mutual misalignment between these three entities are collectively referred to as Factor Alignment Problems (FAP). Examples… Read more