Atanu Saha, Burton G. Malkiel and Alex Grecu A robust finding in this paper is that extreme movements in stock prices and temperature are usually preceded by large average daily movements during the preceding three-day period. This suggests that investors might fashion a market timing strategy, switching from stocks to cash in advance of predicted… Read more
Articles
OPTIMAL REBALANCING: A SCALABLE SOLUTION
Mark Kritzman, Simon Myrgren and Sébastien Page Institutional investors usually employ mean–variance analysis to determine optimal portfolio weights. Almost immediately upon implementation, however, the portfolio’s weights become suboptimal as changes in asset prices cause the portfolio to drift away from the optimal targets. We apply a quadratic heuristic to address the optimal rebalancing problem, and… Read more
SHORTING DEMAND AND PREDICTABILITY OF RETURNS
Lauren Cohen, Karl B. Diether and Christopher J. Malloy 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 in the securities lending market. Specifically, when… Read more
A STRUCTURAL ANALYSIS OF THE DEFAULT SWAP MARKET—PART 2 (RELATIVE VALUE)
Lisa Goldberg, Rajnish Kamat and Jason Kremer 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 for the United States and Europe earned… 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 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 of the risk-free rate of interest, the… Read more
LIQUIDITY RISK AND LIMITED ARBITRAGE: ARE TAXPAYERS HELPING HEDGE FUNDS GET RICH?
Evan Gatev 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 subsidy while tax-avoiding hedge funds reap the… Read more
THE VALUE SPREAD AS A MARKET TIMING SIGNAL: EVIDENCE FROM ASIA
Charles E. Hyde and Michael P. Triguboff Using monthly data from 1992 to 2006, we show that 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 two value spreads is… Read more
THE 4% RULE—AT WHAT PRICE?
Jason S. Scott, William F. Sharpe and John G. Watson The 4% rule is the advice many retirees follow for managing spending and investing. We examine this rule’s inefficiencies—the price paid for funding its unspent surpluses and the overpayments made to purchase its spending policy. We show that a typical rule allocates 10–20% of a… Read more
VALUATION OF CREDIT CONTINGENT CLAIMS: AN ARBITRAGE-FREE CREDIT MODEL
Thomas S. Y. Ho and Sang Bin Lee 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 pricing the interest contingent claims. The Ho–Lee… Read more
WHICH EXPLAINS AN EQUITY INDEX’S RETURN BETTER, THE CHANGE IN ITS OWN IMPLIED VOLATILITY OR THAT FOR A BROADER INDEX?
Susana Yu and Dean Leistikow This study examines the proper risk proxy for an equity index. For each of nine indexes, an implied volatility index (VI) is computed from its options. For each, it determines whether the indexes’ return is explained better by the contemporaneous change in its own VI or that for a broader… Read more