3rd Quarter (2009)

Susana Yu and Dean Leistikow This paper examines the proper risk proxy for an equity index. For each of nine indexes, an implied volatility index (VI) is computed from its options. For each, it determines whether the indexes return is explained better by the contemporaneous change in its own VI or that for a broader… Read more

Jason S. Scott, William F. Sharpe and John G. Watson The 4% rule is the advice many retirees follow for managing spending and investing. We examine this rules inefficiencies – the price paid for funding its unspent surpluses and the overpayments made to purchase its spending policy. We show that a typical rule allocates 10%-20%… Read more

Alexander D. Healy and Andrew W. Lo In response to the current financial crisis, a number of hedge funds have implemented gates on their funds that restrict withdrawals when the sum of redemption requests exceeds a certain percentage of the funds total assets. To reduce the investors risk exposures during these periods, we propose a… Read more

Thomas S. Y. Ho and Sang Bin Lee This study extends the generalized Ho-Lee model to the credit derivative swap (CDS) curve movements that ensures the hazard rate movement is arbitrage-free for any given CDS curve. This study shows that the generalized Ho-Lee model is not limited to pricing the interest contingent claims. The Ho-Lee… Read more

Vineer Bhansali This paper addresses aspects of the current financial market crisis by drawing analogies from the physics of phase transitions. If such an analogy is indeed appropriate, then the evolving dynamics of financial markets might have characteristics that the traditional models of finance will not be able to handle, requiring the need for a… Read more