3rd Quarter (2008)

Deepak Agrawal and Jeffrey R. Bohn Models of credit valuation generally predict a hump-shaped spread term structure for low quality issuers. This is understood to be driven by the shape of the underlying conditional default probabilities curve. We show that (a) recovery assumptions and (b) deviation of bond’s price from its par value can also… Read more

Lisa R. Goldberg, Rajnish Kamat and Vijay Poduri We analyze the default swap market with the two factor I2 structural model, which is driven by firm value and firm leverage. As we show empirically, the de- fault swap market incorporates these risks differentially over time, by region, by industry, and by coarse quality. This leads… Read more

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

Edward E. Qian Portfolio implementation is an essential part of active investment strategies. The trading horizon-the length of time allocated for trade implementation, is an important consideration in portfolio trading. Previous research on optimal trading limits the trading horizon as a fixed value. In this paper, we treat it as an endogenous factor and find… Read more

Andrew W. Lo The value of active investment management is traditionally measured by alpha, beta, volatility, tracking error, and the Sharpe and information ratios. These are essentially static characteristics of the marginal distributions of returns at a single point in time, and do not incorporate dynamic aspects of a manager’s investment process. In this paper… Read more