Volume 6, Number 4, Fourth Quarter 2008 View PDF… Read more
2008
PRACTITIONER’S DIGEST
Volume 6, Number 3, Third 2008 View PDF… Read more
BOOK REVIEWS: Behavioral Investing: A Practitioners Guide to Applying Behavioral Finance
Volume 6, Number 4, Fourth Quarter 2008 Behavioral Investing: A Practitioners Guide to Applying Behavioral Finance James Montier Reviewed by Bruce Grantier View PDF… Read more
CASE STUDIES: Consolidated Lunch Pail
Jack L. Treynor Volume 6, Number 4, Fourth Quarter 2008 View PDF… Read more
Measuring the Risk of Large Losses
Kay Giesecke, Thorsten Schmidt and Stefan Weber Volume 6, Number 4, Fourth Quarter 2008 Risk management is an important component of the investment process. It requires quantitative measures of risk that provide a metric for the comparison of financial positions. In this expository note we give an overview of risk measures. In particular, we contrast… Read more
Do Funds-of-Funds Deserve Their Fees-on-Fees
Andrew Ang, Matthew Rhodes-Kropf and Rui Zhao Volume 6, Number 4, Fourth Quarter 2008 Since the after-fee returns of funds-of-funds are, on average, lower than hedge fund returns, it is easy to conclude that funds-of-funds do not add value compared to hedge funds. However, funds-of-funds should not be evaluated relative to hedge fund returns in… Read more
Hedge Fund Due Diligence: A Source Of Alpha In A Hedge Fund Portfolio Strategy
Stephen J. Brown, Thomas L. Fraser and Bing Liang Volume 6, Number 4, Fourth Quarter 2008 Due diligence is an important source of alpha in a well designed hedge fund portfolio strategy. It is generally understood that the high returns possible in investing in hedge funds are somewhat offset by the relative lack of transparency… Read more
The Performances of MBS Hedge Funds and Mutual Funds: A Puzzle
Xiaoqing Eleanor Xu and Anthony L. Loviscek Volume 6, Number 4, Fourth Quarter 2008 MBS hedge funds have outperformed the Lehman MBS Index by an average of 210 basis points annually from 1992 through 2003. By comparison, MBS mutual funds have underperformed the Lehman MBS Index by an average of 141 basis points per year… Read more
INSIGHTS: Risk and Return in Behavioral SDF-Based Asset Pricing Models
Hersh Shefrin Volume 6, Number 4, Fourth Quarter 2008 Behavioral finance has profound implications for the pricing of all assets, from standard fixed income securities and equity to complex derivatives. This paper describes a general, unified framework for analyzing the impact of sentiment on asset prices. The approach brings together the psychological assumptions favored by… Read more
BOOK REVIEWS: The Age of Turbulence: Adventures in a New World
Volume 6, Number 3, Third Quarter 2008 The Age of Turbulence: Adventures in a New World Alan Greenspan Reviewed by Bruce Grantier View PDF… Read more
CASE STUDIES
Jack L. Treynor Volume 6, Number 3, Third Quarter 2008 View PDF… Read more
Humpbacks in Credit Spreads
Deepak Agrawal and Jeffrey R. Bohn Volume 6, Number 3, Third Quarter 2008 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… Read more
A Structural Analysis of the Default Swap Market, Part 1 (Calibration)
Lisa R. Goldberg, Rajnish Kamat and Vijay Poduri Volume 6, Number 3, Third Quarter 2008 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… Read more
The Structure of Hybrid Factor Models
Jose Menchero and Indrajit Mitra Volume 6, Number 3, Third Quarter 2008 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… Read more
Optimal Trading Strategy with Optimal Horizon
Edward E. Qian Volume 6, Number 3, Third Quarter 2008 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… Read more
Where Do Alphas Come From?: A New Measure of the Value of Active Investment Management
Andrew W. Lo Volume 6, Number 3, Third Quarter 2008 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… Read more
BOOK REVIEWS: Capital Ideas Evolving
Volume 6, Number 2, Second Quarter 2008 Capital Ideas Evolving Peter L. Bernstein Reviewed by Frank J. Jones View PDF… Read more
CASE STUDIES: Best Seller Productions
Jack L. Treynor Volume 6, Number 2, Second Quarter 2008 View PDF… Read more
Beyond Value at Risk: Forecasting Portfolio Loss at Multiple Horizons
Lisa R. Goldberg, Guy Miller and Jared Weinstein Volume 6, Number 2, Second Quarter 2008 We develop a portfolio risk model that uses high-frequency data to forecast the loss surface, which is the set of loss distributions at future time horizons. Our model uses a fully automated, semi-parametric fitting procedure that has its basis in… Read more
How Does Investor Sentiment Affect the Cross-Section of Stock Returns?
Malcolm Baker, Johnathan Wang and Jeffrey Wurgler Volume 6, Number 2, Second Quarter 2008 Broad waves of investor sentiment should have larger impacts on securities that are more difficult to value and to arbitrage. Consistent with this intuition, we find that when an index of investor sentiment takes low values, small, young, high volatility, unprofitable… Read more
First Come First Disserved
Joseph Cerniglia and Joshua Livnat Volume 6, Number 2, Second Quarter 2008 This study investigates whether stock market reactions to earnings information of firms that release their earnings close to quarter-end (Early) are systematically different from their industry peers which report later during the quarter (Late). Unexpectedly, we find that immediate market reactions to early… Read more
Optimal Static Allocation Decisions in the Presence of Portfolio Insurance
Felix Goltz, Lionel Martellini and Koray D. Simsek Volume 6, Number 2, Second Quarter 2008 The focus of this paper is to determine what fraction a myopic risk-averse investor should allocate to investment strategies with convex exposure to stock market returns in a general economy with stochastically time-varying interest rates and equity risk premium. Our… Read more
Are Analysts All Alike? Identifying Earnings Forecasting Ability
Louis K. C. Chan, David Ikenberry, Josef Lakonishok and Sangwoo Lee Volume 6, Number 2, Second Quarter 2008 Investors and the financial media apparently believe that some Wall Street equity analysts research is superior to others. We examine whether such quality differentials exist, in terms of analysts ability to forecast earnings accurately, and whether these… Read more
BOOK REVIEWS: The Little Book of Value Investing / The Little Book of Common Sense Investing
Volume 6, Number 1, First Quarter 2008 The Little Book of Value Investing Christopher Browne Reviewed by Javier Estrada The Little Book of Common Sense Investing John Bogle Reviewed by Javier Estrada View PDF… Read more
CASE STUDIES
Jack L. Treynor View PDF… Read more
Noise, CAPM and the Size and Value Effects
Robert Arnott and Jason Hsu Volume 6, Number 1, First Quarter 2008 We model a continuous time one factor economy where stock prices are noisy proxies of the informationally efficient stock values. The pricing error process is modeled as a mean-reverting process, which gives us a well-defined notion of over-pricing (positive pricing error) and under-pricing… Read more
A Model of Fund Growth For Managed Futures: Evidence of Managerial Skill
Paul Lajbcygier Volume 6, Number 1, First Quarter 2008 Fund size is an essential component of a funds overall value. In this work, we argue that growth in fund size results from managerial skill. To test this argument, we estimate a model that links fund growth to performance characteristics. We use the model to isolate… Read more
The Profound Effects of Automation on Stock Markets Around the World
Pankaj K. Jain Volume 6, Number 1, First Quarter 2008 We document the profound impact of technology on the functioning of financial markets around the world. Specially, we report a strong trend towards fully automated trading systems. This trend is associated with a significant decline in the cost of equity capital. These findings are consistent… Read more
Bayes vs. Resampling: A Rematch
Campbell R. Harvey, John C. Liechty and Merrill W. Liechty Volume 6, Number 1, First Quarter 2008 We replay an investment game that compares the performance of a player using Bayesian methods for determining portfolio weights with a player that uses the Monte Carlo based resampling approach advocated in Michaud (Efficient Asset Management. Boston: Harvard… Read more
Estimation Error and Portfolio Optimization: A Resampling Solution
Richard Michaud and Robert Michaud Volume 6, Number 1, First Quarter 2008 Markowitz (1959) mean-variance (MV) portfolio optimization has been the practical standard for asset allocation and equity portfolio management for almost 50 years. However it is known to be overly sensitive to estimation error in risk-return estimates and have poor out-of-sample performance characteristics. The… Read more
INSIGHTS: Why is There a Home Bias? Count the Teeth!
Jitka Hilliard and Jimmy E. Hilliard Volume 6, Number 1, First Quarter 2008 Under somewhat idealized conditions, investors would achieve the best risk return tradeoff by allocation equity investment in each country equal to its percentage share of world equity capitalization. But factual evidence confirms that domestic investors prefer domestic stocks. For example, domestic investors… Read more