Volume 7, Number 1, First Quarter 2009 View PDF… Read more
2009
BOOK REVIEW: The Ascent of Money: A Financial History of the World
Volume 7, Number 4, Fourth Quarter 2009 The Ascent of Money: A Financial History of the World Niall Ferguson Reviewed by Bruce Grantier View PDF… Read more
SURVEYS AND CROSSOVERS: Financial Applications with Parallel R
Sanjiv R. Das and Brian Granger Volume 7, Number 4, Fourth Quarter 2009 The use of statistical packages in finance has two functions. One, econometric analysis of large volumes of data, and two, programming financial models. A popular package for these purposes is R. In this article we will examine two canonical applications of parallel… Read more
CASE STUDIES
Volume 7, Number 4, Fourth Quarter 2009 Jack L. Treynor View PDF… Read more
Striking Regulatory Irons While Hot
Hersh Shefrin and Meir Statman Volume 7, Number 4, Fourth Quarter 2009 We are in the midst of what might end up as the most significant change to financial regulations since the Great Depression. This is because the financial and economic crisis that continues to engulf us is the most severe crisis since the Great… Read more
The Dynamics of Leveraged and Inverse Exchange-Traded Funds
Minder Cheng and Ananth Madhavan Volume 7, Number 4, Fourth Quarter 2009 Leveraged and inverse Exchange-Traded Funds (ETFs) have attracted significant assets lately. Unlike traditional ETFs, these funds have leverage explicitly embedded as part of their product design. While these funds are primarily used by short-term traders, they are gaining popularity with individual investors placing… Read more
The Risk That Risk Will Change
Robert F. Engle Volume 7, Number 4, Fourth Quarter 2009 Standard approaches to risk management focus on short run risks, yet many positions are held for longer periods. Over such holding periods there is a risk that risks will change. In this note several easily implemented approaches to estimating the term structure of risk are… Read more
INSIGHTS: The 7 Habits of Highly Suspicious Hedge Funds
Richard Bookstaber Volume 7, Number 4, Fourth Quarter 2009… Read more
BOOK REVIEW: The Logic of Life
Volume 7, Number 3, Third Quarter 2009 The Logic of Life Tim Harford Reviewed by Javier Estrada View PDF… Read more
SURVEYS: Managing Interest Rate Risk: The Next Challenge?
Sanjay K. Nawalkha and Gloria M. Soto Volume 7, Number 3, Third Quarter 2009 Are the managers of financial institutions ready for the small but increasingly significant risk of inflation in the near future, due to the unprecedented fiscal and monetary responses of the US government to prevent an economic collapse? This paper addresses this… Read more
CASE STUDIES: St. Xavior Parish Church
J. Peter Williamson Volume 7, Number 3, Third Quarter 2009 View PDF… Read more
Which Explains an Equity Index’s Return Better, the Change in Its Own Implied Volatility or That for a Broader Index?
Susana Yu and Dean Leistikow Volume 7, Number 3, Third Quarter 2009 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… Read more
The 4% Rule At What Price?
Jason S. Scott, William F. Sharpe and John G. Watson Volume 7, Number 3, Third Quarter 2009 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… Read more
Jumping the Gates: Using Beta-Overlay Strategies to Hedge Liquidity Constraints
Alexander D. Healy and Andrew W. Lo Volume 7, Number 3, Third Quarter 2009 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… Read more
Valuation of Credit Contingent Claims: An Arbitrage-Free Credit Model
Thomas S. Y. Ho and Sang Bin Lee Volume 7, Number 3, Third Quarter 2009 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… Read more
INSIGHTS: Market Crises Can the Physics of Phase Transitions and Symmetry Breaking Tell Us Anything Useful?
Vineer Bhansali Volume 7, Number 3, Third Quarter 2009 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… Read more
BOOK REVIEWS: Enough. True Measures of Money, Business and Life
Volume 7, Number 2, Second Quarter 2009 Enough. True Measures of Money, Business and Life John C. Bogle Reviewed by Bruce Grantier View PDF… Read more
CASE STUDIES: The Liquidation of Amaranth
George Chacko and Scott Thomas Volume 7, Number 2, Second Quarter 2009 View PDF… Read more
SURVEYS AND CROSSOVERS: Dealing With Dimension: Option Pricing on Factor Trees
Sanjiv R. Das and Brian Granger Volume 7, Number 2, Second Quarter 2009 We present a scheme for pricing derivatives on M assets on K -factor recombining trees with N periods. The computational complexity of these trees is O(NK +1), i.e. polynomial in N, making it possible to price a wide range of derivatives without… Read more
The Value Spread as a Market Timing Signal: Evidence from Asia
Charles E. Hyde and Michael P. Triguboff Volume 7, Number 2, Second Quarter 2009 Using monthly data from 1992-2006, we show the value premium in Asia ex Japan is positively related to the cross-sectional dispersion of four common value ratios. The book-to-price and cash flow-to-price spreads exhibit the strongest relationship. Typical month-to-month variation in these… Read more
A Simple Model for Time-Varying Expected Returns on the S&P 500 Index
James S. Doran, Ehud I. Ronn and Robert S. Goldberg Volume 7, Number 2, Second Quarter 2009 This paper presents a parsimonious, implementable model for the estimation of the short and long-term expected rates of return on the S&P 500 stock market Index. Sufficient statistics for the expected return on the S&P 500 Index consist… Read more
A Structural Analysis of the Default Swap Market – Part II (Relative Value)
Lisa Goldberg, Rajnish Kamat and Jason Kremer Volume 7, Number 2, Second Quarter 2009 We evaluate several long/short strategies for managing a portfolio of default swaps. The strategies are based on a ranking of credits by residuals, which are the differences between market spreads and spreads generated by the iSpread structural model. Investment grade portfolios… Read more
Liquidity Risk and Limited Arbitrage: Are Taxpayers Helping Hedge Funds Get Rich?
Evan Gatev Volume 7, Number 2, Second Quarter 2009 Hedge funds facing capital constraints during market-wide liquidity shocks use bank credit lines to reduce the limits to arbitrage. During shocks, government-protected bank deposits receive inflows and this exclusive low cost funding enables banks to lend to hedge funds. In effect, banks compete away the government… Read more
BOOK REVIEWS: Plight of the Fortune Tellers: Why We Need to Manage Risk Differently
Volume 7, Number 1, First Quarter 2009 Plight of the Fortune Tellers: Why We Need to Manage Risk Differently Riccardo Rebonato Reviewed by Lisa R. Goldberg View PDF… Read more
SURVEY OF THE LITERATURE: The Housing Bubble and Resulting Mortgage Crisis
Robert Hendershott, Patric Hendershott and James Shilling Volume 7, Number 1, First Quarter 2009 In the late 1990s, United States house prices began a long boom that peaked in mid 2006. The subsequent reversal of the housing boom has spawned a major crisis in the credit markets. This paper reviews the financial developments that stimulated… Read more
CASE STUDIES: Never Look a Gift Horse In the Mouth
Jack L. Treynor Volume 7, Number 1, First Quarter 2009 View PDF… Read more
Optimal Rebalancing: A Scalable Solution
Mark Kritzman, Simon Myrgren and Sébastien Page Volume 7, Number 1, First Quarter 2009 Institutional investors usually employ mean-variance analysis to determine optimal portfolio weights. Almost immediately upon implementation, however, the portfolio’s weights become sub-optimal as changes in asset prices cause the portfolio to drift away from the optimal targets. We apply a quadratic heuristic… Read more
Shorting Demand and Predictability of Returns
Lauren Cohen, Karl B. Diether and Christopher J. Malloy Volume 7, Number 1, First Quarter 2009 We examine the link between shorting and future returns in the equities market using a proprietary dataset of stock loan fees and quantities. We find that separating supply and demand shifts provides a richer view of the information contained… Read more
The Clustering of Extreme Movements: Stock Prices and the Weather
Atanu Saha, Burton G. Malkiel and Alex Grecu Volume 7, Number 1, First Quarter 2009 One striking feature of the United States stock market is the tendency of days with very large movements of stock prices to be clustered together. We define an extreme movement in stock prices as one that can be characterized as… Read more
INSIGHTS: Stockholder Rights and Carl Icahn
Harold Bierman, Jr. Volume 7, Number 1, First Quarter 2009 One might conject that shareholder activism should be praised and welcomed by shareholders. This paper suggests that actions, alleged to be on behalf of shareholders, can be shown to be on behalf of a small group of activist investors, and not for the broader group… Read more