Volume 3, Number 4, Third Quarter 2005 View PDF… Read more
2005
BOOK REVIEWS: Freakonomics / The Future for Investors: Why the Tried and True Triumph over the Bold and the New
Volume 3, Number 4, Fourth Quarter 2005 Freakonomics Steven D. Levitt and Stephen J. Dubner Reviewed by Tim Adler The Future for Investors: Why the Tried and True Triumph over the Bold and the New Jeremy J. Siegel Reviewed by Bruce Grantier View PDF… Read more
CASE STUDIES: Quiz for Fed Candidates
Jack L. Treynor Volume 3, Number 4, Fourth Quarter 2005 View PDF… Read more
Great Moments in Financial Economics: IV. The Fundamental Theorem (Part I)
Mark Rubinstein Volume 3, Number 4, Fourth Quarter 2005 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… Read more
Decomposing and Managing Multivariate Risks: The Case of Variable Annuities
Thomas S. Y. Ho and Blessing Mudavanhu Volume 3, Number 4, Fourth Quarter 2005 The market of variable annuities has grown tremendously in recent years and has become a significant part of our capital markets. These equity and interest rate structured products offer a broad range of guarantees, whose risks are typically borne by the… Read more
Reduced Form vs. Structural Models of Credit Risk: A Case Study of Three Models
Navneet Arora, Jeffrey R. Bohn and Fanlin Zhu Volume 3, Number 4, Fourth Quarter 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… Read more
Default Correlation in Reduced-Form Models
Fan Yu Volume 3, Number 4, Fourth Quarter 2005 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… Read more
Revisiting the Slope of the Credit Curve
David Lando and Allan Mortensen Volume 3, Number 4, Fourth Quarter 2005 The term structure of interest rates contains information about the market’s expectations of the direction of future interest rates. Similarly, the term structure of credit spreads contains information about the market’s perception of future credit spreads. The term structure of credit spreads is… Read more
BOOK REVIEWS: Fischer Black and the Revolutionary Idea of Finance / The Sociology of Financial Markets
Volume 3, Number 3, Third Quarter 2005 Fischer Black and the Revolutionary Idea of Finance Perry Mehrling Reviewed by Mark Kritzman The Sociology of Financial Markets Karin Knorr Cetina and Alex Preda Reviewed by Elizabeth Gorman View PDF… Read more
SURVEY OF THE LITERATURE: Power Laws
Sanjiv R. Das and Jacob Sisk Volume 3, Number 3, Third Quarter 2005 We provide a brief survey of two areas in finance in which power laws may play an important role—one, in better describing the tails of return distributions; and two, in market microstructure modeling. While the existing literature in finance is not extensive… Read more
CASE STUDIES: Cereal Mergers
Jack L. Treynor Volume 3, Number 3, Third Quarter 2005 View PDF… Read more
Investment Banker Directors and Affiliated Analysts’ Forecasts
Murali Jagannathana and Srinivasan Krishnamurthy Volume 3, Number 3, Third Quarter 2005 Equity research analysts of investment banks have been subjected to significant regulatory scrutiny and enforcement action in recent years. Specifically, two major issues have attracted legal attention: (1) whether analysts favorably bias their forecasts to secure investment-banking business, and (2) whether selective disclosure… Read more
NASDAQ-100 Index Futures: Intraday Momentum or Reversal?
Susana Yu, Joel Rentzler and Avner Wolf Volume 3, Number 3, Third Quarter 2005 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… Read more
Regulation Fair Disclosure and Volatility: An Intraday Analysis
Robert B. Mendelson, Rajneesh Sharma and Daniel G. Weaver Volume 3, Number 3, Third Quarter 2005 Regulation Fair Disclosure (Reg FD) prohibits selective disclosure policies by companies. This study uses a sample of earning announcements before and after Reg FD to examine the impact on trade size, share volume, number of transactions per day, intraday… Read more
Call Protection in Convertible Bonds: How Much and Why?
Timo P. Korkeamaki and William T. Moore Volume 3, Number 3, Third Quarter 2005 This article is drawn largely from “Convertible Bond Design and Capital Investment: The Role of Call Provisions,” published by the authors in the Journal of Finance, Volume 59, 2004, pp. 391-405. The authors are indebted to colleagues at the University of… Read more
BOOK REVIEWS: Neoclassical Finance / Experimental Economics
Volume 3, Number 2, Second Quarter 2005 Neoclassical Finance Stephen A. Ross Reviewed by Jennifer Chu Experimental Economics Ross M. Miller Reviewed by Ritirupa Samanta View PDF… Read more
SURVEY OF THE LITERATURE: Genetic Algorithms
Sanjiv R. Das Volume 3, Number 2, Second Quarter 2005 View PDF… Read more
CASE STUDIES: Financial Literacy
Jack L. Treynor Volume 3, Number 2, Second Quarter 2005 View PDF… Read more
Motivation and Performance Following Open-Ending of Closed-End Funds
Aigbe Akhigbe, Jeff Madura and Alan Tucker Volume 3, Number 2, Second Quarter 2005 This study investigates the motives for open-ending closed-end funds, and performance of closed-end funds following open-ending announcements. We find that the propensity to open end is higher for funds that are larger, have high expense ratios, exhibit high volatility, and whose… Read more
Global Diversification
Meir Statman and Jonathan Scheid Volume 3, Number 2, Second Quarter 2005 Correlations between the returns of US stocks and international stocks were higher recently than in the past, reaching 0.86 during the 60 months ending in December 2003. Today’s investors note the high correlations between US and international stocks and doubt the benefits of… Read more
The Kiss Of Death: A 5-Star Morningstar Mutual Fund Rating?
Matthew R. Morey Volume 3, Number 2, Second Quarter 2005 We examine the effect that an initial 5-star Morningstar mutual fund rating has on future fund performance, strategy, risk-taking, expenses, and portfolio turnover. Using a sample of diversified domestic equity funds from the 1990s we find that during the 3 years after a fund received… Read more
How New Entry in Options Markets Affected Market Making and Trading Costs
Patrick de Fontnouvelle, Raymond P. H. Fishe and Jeffrey H. Harris Volume 3, Number 2, Second Quarter 2005 A significant competition for order flow in options markets occurred in August 1999. Before the competition, the majority of option volume arose from exclusive listings. By the end of September 1999, entry by existing option exchanges had… Read more
Developing Better Fee Structures for Mutual Funds
Ronald T. Wilcox Volume 3, Number 2, Second Quarter 2005 This paper presents a management decision model for setting mutual fund fees. The model pairs information obtained from a conjoint analysis, designed to uncover investors’ preferences for different fee structures, with information on the expected revenue generated from various fee structures to suggest a set… Read more
INSIGHTS: The Lorenz Curve
Jack L. Treynor Volume 3, Number 2, Second Quarter 2005 For a century, the critics’ favorite example of the failures of capitalism has been the Lorenz curve. They rank households from poorest to richest and then plot cumulative wealth against the cumulative number of households. The critics argue that, if capitalism were fair, the Lorenz… Read more
BOOK REVIEWS: Credit Risk Modeling / My Life As A Quant Reflections on Physics and Finance
Volume 3, Number 1, First Quarter 2005 Credit Risk Modeling David Lando Reviewed by Mark Kritzman My Life As A Quant Reflections on Physics and Finance Emanuel Derman Reviewed by Mark Kritzman View PDF… Read more
SURVEY OF THE LITERATURE: Recovery Risk
Sanjiv R. Das Volume 3, Number 1, First Quarter 2005 I survey a selection of recent working papers on recovery rates, providing a framework for extant research. Simpler versions of models are also presented with a view to aid accessibility and pedagogical presentation. Despite the obvious empirical difficulties encountered with recovery rate data, modeling advances… Read more
CASE STUDIES: Betting on Management
Jack L. Treynor Volume 3, Number 1, First Quarter 2005 View PDF… Read more
The Year-End Price of Risk in a Market for Liquidity
Mark D. Griffiths and Drew B. Winters Volume 3, Number 1, First Quarter 2005 Musto (1997, Journal of Finance 52(4), 1861-1882) identifies a year-end effect in commercial paper (CP) and suggests that the price of risk may increase at the year-end. Griffiths and Winters (2003, Journal of Business, forthcoming) show that the timing of the… Read more
Investors Like Firms That Expense Employee Stock Options and They Dislike Firms
Fayez A. Elayan, Kuntara Pukthuanthong and Richard Roll Volume 3, Number 1, First Quarter 2005 During 2002 and 2003, 140 publicly traded US firms announced their intention to recognize an accounting expense when stock options are granted to employees. Many similar firms elected not to expense options. We study the stock market’s reaction. There is… Read more
Implications of Correlated Default for Portfolio Allocation to Corporate Bonds
Mark B. Wise and Vineer Bhansali Volume 3, Number 1, First Quarter 2005 This article deals with the problem of optimal allocation of capital to corporate bonds in fixed income portfolios when there is the possibility of correlated defaults. Using a multivariate normal Copula function for the joint default probabilities we show that retaining the… Read more
Design of Financial Systems: Towards a Syntheses of Function and Structure
Robert C. Merton and Zvi Bodie Volume 3, Number 1, First Quarter 2005 This paper proposes a functional approach to designing and managing the financial systems of countries, regions, firms, households, and other entities. It is a synthesis of the neoclassical, neo-institutional, and behavioral perspectives. Neoclassical theory is an ideal driver to link science and… Read more
Asset/Liability Management and Enterprise Risk Management of an Insurer
Thomas S. Y. Ho Volume 3, Number 1, First Quarter 2005 Risk management techniques used in banks and trading floors are generally not applicable to insurance companies. Risk measures and risk monitoring approaches must be developed to respond to the challenges to the insurance industry. This paper describes the current risk management practices for both… Read more
A Markov Chain Monte Carlo Method for Derivative Pricing and Risk Assessment
Sanjiv R. Das and Alistair Sinclair Volume 3, Number 1, First Quarter 2005 Derivative security pricing and risk measurement relies increasingly on lattice representations of stochastic processes, which are a discrete approximation of the movement of the underlying securities. Pricing is undertaken by summation of node values on the lattice. When the lattice is large… Read more