1st Quarter (2013)

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 certainty equivalents (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… Read more

Licheng Sun, Chris Stivers and Ajay Kongera The January Barometer states that the sign of the stock-markets returns in January can predict the subsequent 11-month stock-market return over February to December. Cooper et al. (2010) show that the best way to use the January Barometer is to be long following positive Januarys and invest in… Read more

Mark S. Seasholes and Ning Zhu This paper tests the performance of individuals’ equity investments. We study over 40,000 accounts and 950,000 trades from a large discount broker. Individuals invest heavily in local stocks and put 14% more into these stocks than a market-neutral portfolio would suggest. Using holdings-based calendar-time portfolios, we find the local… Read more

Richard O. Michaud, David N. Esch and Robert O. Michaud The Markowitz (1952, 1959) mean-variance (MV) efficient frontier has been the theoretical standard for defining portfolio optimality for more than a half century. However, MV optimized portfolios are highly susceptible to estimation error and difficult to manage in practice (Jobson and Korkie 1980, 1981; Michaud… Read more

Xiaojing Dong and Carrie H. Pan The Bayesian statistical method provides an alternative approach to study some of the classical problems in finance. In the existing finance literature, research that uses Bayesian econometrics is primarily in the area of asset pricing. Bayesian applications in corporate finance have been rather limited, despite its great potential as… Read more