Fourth Quarter (2012)

Zhirong Chen and Wai Mun Fong Volume 10, Number 4, Fourth Quarter 2012 This paper uses risk neutral densities (RNDs) of stock options to investigate the markets perceptions of crash risk in the recent U.S. subprime crisis. RNDs were estimated using the double lognormal method for the S&P 500 market index, Lehman Brothers, Merrill Lynch… Read more

Roger M. Stein Volume 10, Number 4, Fourth Quarter 2012 In this article, we outline some concepts relating to the use of stress testing in credit risk management. We begin by providing a simple taxonomy of stress scenarios and discussing the trade-offs that different approaches require for implementation. Our taxonomy is modeled after one that… Read more

Michael Dempsey Volume 10, Number 4, Fourth Quarter 2012 We examine the contribution of noise to the theoretical underpinnings of Fundamental Indexation (FI). Although we argue that market capital-weighted indexes do not incur a structural drag due to noise as claimed by the proponents of FI, we conclude, nevertheless, that noise as advanced by FI… Read more

Riccardo Rebonato and Alexander Denev Volume 10, Number 4, Fourth Quarter 2012 We propose a method to integrate frequentist and subjective probabilities in order to obtain a coherent asset allocation in the presence of stress events. Our working assumption is that in normal market asset returns are sufficiently regular for frequentist statistical techniques to identify… Read more

Richard O. Michaud, David N. Esch and Robert O. Michaud Volume 10, Number 4, Fourth Quarter 2012 The when-to-trade decision is a critical yet neglected component of modern asset management. Typical rebalancing rules are based on suboptimal heuristics. Rebalancing is necessarily a statistical similarity test between current and proposed optimal portfolios. Available tests ignore many… Read more