Vol. 22, No. 3, 2024 Douglas T. Breeden Option prices contain information about implicit state prices. In their recent article, Breeden and Litzenberger (B-L, 2022) demonstrated how option prices in bond markets from interest rate cap and floor price data can be used to identify the impacts of central bank policies on the distribution of… Read more
Articles
Equivalent Expectation Measures for Risk and Return Analysis of Contingent Claims
Vol. 22, No. 3, 2024 Sanjay K. Nawalkha and Xiaoyang Zhuo Nearly half-a-century after the advent of equivalent martingale measures (EMMs), Nawalkha and Zhuo (2022, 2023) generalize these measures to obtain equivalent expectation measures (EEMs) for analyzing risk and return of portfolios of contingent claims over a finite horizon date. The new measures allow the… Read more
Full-Scale Currency Hedging
Vol. 22, No. 2, 2024 by Megan Czasonis, Mark Kritzman and David Turkington After years of spirited debate, most investors agree that to minimize the risk currencies add to a portfolio they should hedge its currency exposures based on its betas relative to the currencies to which it is exposed. However, this notion of hedging… Read more
Night Moves: Is the Overnight Drift the Grandmother of all Market Anomalies?
Vol. 22, No. 2, 2024 by Victor Haghani, Vladimir Ragulin and Richard Dewey Our research in single name stocks suggests that retail trading likely explains the phenomenon of outsized overnight returns at both the level of the overall stock market, and that of individual stocks. We find that the effect exists at the index level… Read more
Extreme Weather and Retirement Savings
Vol. 22, No. 2, 2024 by Ted Daverman, Joshua Kazdin, Michael Pensky and Fiona Sloof In this paper, we discuss the impact of extreme weather on US families with a specific focus on household finances. We first derive a life-cycle model of consumption, then introduce climate change-oriented consumption shocks as an additional expense which is… Read more
Optimal Portfolio Choice with Absorbing Markov Chains: Application to Markets that May Potentially Decouple
Vol. 22, No. 2, 2024 by Andrew Ang, Henry Shen, Jeff Shen and Rui Zhao We develop a model of optimal asset allocation with a market that has the potential to decouple. There are three Markov regimes: a regime where the market remains fully investable, a second regime where the market may become potentially decouple… Read more
Biotech Asset Valuation Methods: A Practitioner’s Guide
Vol. 22, No. 1, 2024 Amitabh Chandra and Sumon Mazumdar Biotech innovations lead to the development of life-saving drugs and vaccines. However, bringing a new drug to market is an expensive,risky, and time-consuming process. According to one survey, the probability that a drug that has completed pre-clinical trials, would successfully pass all three stages of… Read more
Accelerating the Capital Solution to Climate Change
Vol. 22, No. 1, 2024 Yu (Ben) Meng, Anne Simpson, Anna Snider and Christina Yi The missing “I’s” of information and incentives have restrained the potential of the capital markets in previous decades to respond to the growing demand for climate solutions. Progress on both fronts in recent years, however, is moving us rapidly beyond… Read more
Limiting Investment Opportunity Sets, Asset Pricing, and the Roll Critique
Vol. 22, No. 1, 2024 Bob Korkie and H. J. Turtle We consider the impact of low volatility assets on the investment opportunity set (IOS) and resultant asset pricing. The limiting IOS and its finite investable proxy imply an asset pricing model that differs from standard asset pricing models. The Sharpe (1964)–Lintner (1965) CAPM with… Read more
Realativity in Finance: Goals and Risk-Based Asset Pricing for Investors with Multiple Stochastic Goals and Agents
Vol. 21, No. 4, 2023 Arun Muralidhar This asset pricing model incorporates four positive realities of investing; that investors have many stochastic goals, seek to delegate to skillful agents, explicitly specify risk budgets, and maximize risk-adjusted relative returns. As a result, it also incorporates the relative nature of investing—“Realativity”. Critical to investment practice, it provides… Read more