Jason T. Greene and Conrad S. Ciccotello 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 return. While this impact can be directly… Read more
Articles
CAN CONTRARIAN STRATEGIES IMPROVE MOMENTUM PROFITS?
Kalok Chan and Hung Wan Kot 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 of price reversal (MSLS). Our empirical results show… Read more
GREAT MOMENTS IN FINANCIAL ECONOMICS: IV. THE FUNDAMENTAL THEOREM (PART II)
Mark Rubinstein 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 strategies. Part II presumes the reader is… Read more
DOES THE STOCK MARKET UNDERREACT TO R&D INCREASES?
Allan C. Eberhart, William F. Maxwell and Akhtar R. Siddique We examine a sample of 8313 cases, between 1951 and 2001, where firms unexpectedly increase their research and development expenditures (R&D) by a significant amount. We find consistent evidence that our sample firms are undervalued following their R&D increases as manifested in the significantly positive… Read more
REVISITING THE SLOPE OF THE CREDIT CURVE
David Lando and Allan Mortensen This paper revisits the shape of the credit spread curve using a large data set of credit default swap quotes. Helwege and Turner (1999) find upward-sloping corporate bond spread curves for speculative grade companies and argue that this is inconsistent with many theoretical credit risk pricing models. We find decreasing… Read more
DECOMPOSING AND MANAGING MULTIVARIATE RISKS: THE CASE OF VARIABLE ANNUITIES
Thomas S. Y. Ho and Blessing Mudavanhu Many investment strategies, particularly in asset-liability management, involve multivariate risks. Asset-liability management strategies in pension, endowments, insurance, banking often confront with complex correlation structure of equity, currency and interest rate risks. This paper proposes a methodology that uses financial engineering to decompose such multivariate risks into linear combinations… Read more
REDUCED FORM VS. STRUCTURAL MODELS OF CREDIT RISK: A CASE STUDY OF THREE MODELS
Navneet Arora, Jeffrey R. Bohn and Fanlin Zhu In this paper, we empirically compare two structural models (basic Merton and Vasicek–Kealhofer (VK)) and one reduced-form model (Hull–White (HW)) of credit risk. We propose here that two useful purposes for credit models are default discrimination and relative value analysis. We test the ability of the Merton… Read more
DEFAULT CORRELATION IN REDUCED-FORM MODELS
Fan Yu Reduced-form models have proven to be a useful tool for analyzing the dynamics of credit spreads. However, some have recently questioned their ability to match the level of empirical default correlation. The key concern appears to be the assumption that defaults are independent conditional on the state variables driving the default intensity. In… Read more
GREAT MOMENTS IN FINANCIAL ECONOMICS: IV. THE FUNDAMENTAL THEOREM (PART I)
Mark Rubinstein This is the fourth in a series of articles in this Journal examining the historical origins of key ideas in the history of financial economics. The fundamental theorem asserts: there are no arbitrage opportunities if and only if state-prices exist. Like Newton’s laws of motion, though highly abstract, it underlies the most important… Read more
NASDAQ-100 INDEX FUTURES: INTRADAY MOMENTUM OR REVERSAL?
Susana Yu, Joel Rentzler and Avner Wolf This paper explores the intraday behavior of the NASDAQ-100 futures index for momentum and reversals. A multiple regression model simultaneously (1) relates today’s intraday returns to yesterday’s and last night’s returns, and (2) estimates how the relationship changes with the signs of yesterday’s and last night’s return, whether… Read more