Vol. 20, No. 1, 2022 by Megan Czasonis, Mark Kritzman and David Turkington The authors describe a new statistical method for improving forecasting called relevance. They describe their new method from both a conceptual and mathematical perspective, and they show how relevance links regressions to event studies and machine learning algorithms… Read more
Articles
Good States, Bad States: What Do Options Tell Us About Schizophrenic Behavior of Mr. Market and What Can We Do About It?
Vol. 19, No. 4, 2021 Vineer Bhansali and Jeremie Holdom Option prices theoretically encapsulate participants’ expectations about good state (bullish) and bad state (bearish) market outcomes. By using a mixture of distributions and reasonable assumptions, the authors extract time series of expected returns, volatilities, and mixture probabilities of these outcomes surrounding the current US elections… Read more
How Do Factor Premia Vary Over Time? A Century of Evidence
Vol. 19, No. 4, 2021 Antti Ilmanen, Ronen Israel, Rachel Lee, Tobias J. Moskowitz and Ashwin Thapar Evaluating how factor premia vary over time and across asset classes is challenging due to limited time series data, especially outside of US equities. We examine four prominent factors across six asset classes over a century. We find… Read more
The U.S. Treasury Term Structure and the Distribution of Real GDP Growth
Vol. 19, No. 4, 2021 J. Benson Durham Narrowing at the front but not the long end of the yield curve, notably in both expected rates and term premiums, forecasts lower mean real GDP growth and widens the distribution. But despite undue emphasis among some practitioners and the popular press on outright inversion and recession… Read more
Private Equity Valuation Before and After ASC 820
Vol. 19, No. 4, 2021 Peter Easton, Stephannie Larocque and Jennifer Sustersic Stevens We examine the effect of ASC 820 (formerly SFAS 157) on valuations reported by US private equity funds to their investors. In 2008, the FASB implemented ASC 820 to achieve more consistent measurement and increased transparency in fair value reporting. This new… Read more
Horizon-Adjusted Portfolio Performance Measure
Vol. 19, No. 2, 2021 Yoram Kroll and Moshe Ben-Horin This paper presents a portfolio performance measure that accounts for the investment horizon assuming both risk and loss aversion as suggested by Tversky and Kahneman’s CPT framework. The optimal portfolio risk premiums of such investors decrease with the length of the investment horizon and our… Read more
Insights: Consumption, Investment and Insurance in the Game of Life
Volume 13, Number 3, 2015 Harry M. Markowitz Markowitz (1991) proposed the development of a “Game of Life” simulator in which portfolio selection was just one type of move in the financial actions of a subject household. Sherri Grabot’s invitation to Markowitz in the late 1990s to form and join the design committee of GuidedChoice… Read more
VARGAMMA: A UNIFIED MEASURE OF PORTFOLIO RISK
Kent Osband Most portfolio risk analysis implicitly assumes that risks are stable, despite copious evidence of instability. This article presents an alternative, “VarGamma”, that provides neat formulas for expected risk-adjusted returns even with stochastic volatility and volatility-dependent drift. VarGamma measures are far more flexible and robust than standard mean–variance formulations or quantiles (VaR), with minimal… Read more
ESTIMATING THE NEGATIVE IMPACT OF “NOISE” ON THE RETURNS OF CAP-WEIGHTED PORTFOLIOS IN VARIOUS SEGMENTS OF THE EQUITY MARKETS
Russell J. Fuller, Bing Han and Yining Tung Capital Market Theory assumes that the ex ante market portfolio (which is cap-weighted) lies on the (ex ante) efficient frontier. However, we show that ex ante cap-weighted portfolios will always be interior portfolios relative to the end-of-investment-period ex post efficient frontier. This is due to the arrival… Read more
THE STRUCTURE OF HYBRID FACTOR MODELS
Jose Menchero and Indrajit Mitra We study the problem of augmenting fundamental risk models with statistical factors in order to capture the risk associated with omitted factors. The statistical factors are estimated by applying principal component analysis to the cross-sectional residuals. We show that in the limit of zero noise, the statistical factors can be… Read more