Volume 13, Number 4, Fourth Quarter 2015 View PDF… Read more
2015
INSIGHTS: Limits on the Level of Demand a Country Can Afford
Volume 13, Number 4, Fourth Quarter 2015 Jack Treynor With home goods (e.g urban services) output equals demand; when demand increases we put older machines back to work. But the real wage depends on the productivity of the marginal home goods plant. Because money prices go up when the real wage goes down, an increase… Read more
Fundamental Indexation and the Fama-French Three Factor Model: Risk Assimilation or Stock Mispricing?
Volume 13, Number 4, Fourth Quarter 2015 Xiaofeng Shi, Mike Dempsey and Laurence Irlicht We confirm the outperformance of fundamental indexation (FI) portfolio returns as due to an exploitation of stock mispricing, while, simultaneously, largely explained in terms of the Fama–French three-factor (FF-3F) model. This leads us to conclude that rather than FI representing a… Read more
Efficiently Combining Multiple Sources of Alpha
Jose Menchero and Jyh-Huei Lee Volume 13, Number 4, 2015 In this article, we examine the question of efficiently combining multiple sources of alpha. We begin with a comparison of the various methods used by practitioners for constructing portfolios that capture a single alpha signal. These methods are broadly categorized as either: (a) simple factor… Read more
Investing in the Asset Growth Anomaly Across the Globe
Xi Li and Rodney N. Sullivan Volume 13, Number 4, 2015 We document the existence of an anomalous asset growth effect globally and find that it comprises some combination of a market mispricing and some pervasive global systematic risk. To support our findings, we explore a battery of tests to include how country-level governance and… Read more
Is U.S. Insider Trading Still Relevant? A Quantitative Portfolio Approach
Carr Bettis, John B. Guerard and Daniel McAuley Volume 13, Number 4, 2015 For 40 years academic literature has reported statistically significant excess returns to selected insiders trading in their firms’ shares, and similar evidence for outsiders who selectively mimic insider trading decisions spans three decades. However, constructing tradable signals leveraging insider trading data is… Read more
Book Review: Portfolio Management Under Stress: A Bayesian-Net Approach to Coherent Asset Allocation
Volume 13, Number 4, 2015 Portfolio Management Under Stress: A Bayesian-Net Approach to Coherent Asset Allocation Riccardo Rebonato and Alexander Denev Reviewed by Cel Kulasekaran View PDF… Read more
Case Studies: Male Life Expectancy Graph
Volume 13, Number 4, Fourth Quarter 2015 Jack L. Treynor View PDF… Read more
Funding Translational Medicine via Public Markets: The Business Development Company
Sandra M. Forman, Andrew W. Lo, Monica Shilling and Grace K. Sweeney Volume 13, Number 4, Fourth Quarter 2015 A business development company (BDC) is a type of closed-end investment fund with certain relaxed requirements that allow it to raise money in the public equity and debt markets, and can be used to fund multiple… Read more
PRACTITIONER’S DIGEST
Volume 13, Number 3, Third Quarter 2015 View PDF… Read more
Insights: Consumption, Investment and Insurance in the Game of Life
Volume 13, Number 3, 2015 Harry M. Markowitz Markowitz (1991) proposed the development of a “Game of Life” simulator in which portfolio selection was just one type of move in the financial actions of a subject household. Sherri Grabot’s invitation to Markowitz in the late 1990s to form and join the design committee of GuidedChoice… Read more
Retirement Readiness and Behavioral Finance
Volume 13, Number 3,(2015 Burton G. Malkiel More than 10,000 Baby Boomers will be reaching retirement age every year from now through 2030. Inadequate savings, high cost and poorly designed retirement plans as well as investor behavioral mistakes combine to level most of them woefully unprepared for retirement. The paper suggests a number of possible… Read more
Decentralization in Pension Fund Management
Volume 13, Number 3, (2015) David Blake, Alberto Rossi, Allan Timmermann, Ian Tonks and Russ Wermers The past few decades have seen a major shift from centralized to decentralized investment management by pension fund sponsors, despite the increased coordination problems that this brings. Using a unique, proprietary dataset of pension sponsors and managers, we identify… Read more
Augmented Risk Models to Mitigate Factor Alignment Problems
Volume 13, Number 3, (2015) Anureet Saxena and Robert A. Stubbs Construction of optimized portfolios entails a complex interaction between three key entities, namely, the risk factors, the alpha factors and the constraints. The problems that arise due to mutual misalignment between these three entities are collectively referred to as Factor Alignment Problems (FAP). Examples… Read more
Beware of Children Trading
Volume 13, Number 3, 2015 Henk Berkman, Paul D. Koch and P. Joakim Westerholm Guardians behind underaged accounts are successful at picking stocks. These informed traders tend to channel their best trades through the accounts of children, especially when they trade just before major earnings announcements, large price changes, and takeover announcements. Building on these… Read more
The Value of Active Investing
Craig William French Volume 13, Number 3, Third Quarter 2015 We examine whether the value of active investment management can exceed its cost, and find that it can, by a substantial margin. We consider the 0.67% average cost estimate in French (2008), comparing it with the expected value of a known active investment strategy. For… Read more
CASE STUDIES: The New Colonialism
Jack L. Treynor Volume 13, Number 3, Third Quarter 2015 View PDF… Read more
BOOK REVIEW: Investors and Markets
Volume 13, Number 3, (2015) Investors and Markets William F. Sharpe Reviewed by Wei Chen… Read more
CASE STUDIES: Failure of the Real Wage to Grow
Volume 13, Number 2, Second Quarter 2015 Jack L. Treynor View PDF… Read more
BOOK REVIEW: Think Like a Freak
Volume 13, Number 2, Second Quarter 2015 Think Like a Freak Steven Levitt and Stephen Dubner Reviewed by Javier Estrada View PDF… Read more
PRACTITIONER’S DIGEST
Volume 13, Number 2, (2015) View PDF… Read more
Strategic Asset Allocation with Low-Risk Stocks: A Bootstrap Analysis
Volume 13, Number 2, Second Quarter 2015 Wai Mun Fong and Timothy Koh Traditional asset allocations such as the 60/40 portfolio of stocks/bonds are not as well diversified as many investors believe since almost all the portfolio’s returns are driven by the stock component. This paper examines a novel approach to strategic allocation by combining… Read more
INSIGHTS: What Piketty Doesn’t Understand
Volume 13, Number 2, Second Quarter 2015… Read more
Alternative Currency Hedging Strategies With Known Covariances
Volume 13, Number 2, Second Quarter 2015 Wei Chen, Mark Kritzman and David Turkington Informed investors understand that they should hedge at least some of their portfolios’currency exposure, but the best strategy for doing so remains an open question. We investigate a variety of currency hedging strategies, including linear strategies, non-linear strategies, and combinations thereof… Read more
Growth Optimal Portfolio Insurance for Long-Term Investors
Volume 13, No. 2, Second Quarter, 2015 Daniel Mantilla-García We solve the growth-rate optimal multiplier of a portfolio insurance strategy in the general case with a locally risky reserve asset and stochastic state variables. The level of the optimal time-varying multiplier turns out to be lower than the standard constant multiplier of Constant Proportion Portfolio… Read more
A Structural Macro-Financial Model an Macro-Risk Management
Volume 13, Number 2, Second Quarter 2015 Thomas S. Y. Ho and Sang Bin Lee This paper provides a structural macro-financial model that can be used for the cost and benefit analysis of alternative financial regulatory regimes. The model solves for the optimal financial sector size to the real aggregate asset (household leverage) and to… Read more
Equity Indices’ Returns: Contingent Claims on GDP Stochastic Movements
Volume 13, Number 2, Second Quarter 2015 Thomas S.Y. Ho and Sang Bin Lee This paper proposes an equity index contingent claim model. The model assumes that the equity broad-based market indices’stochastic movements are contingent to macroeconomic risk factors that are derived from Ho et al.’s (HPS, 2012, 2013) and Ho and Lee’s (HL, 2015b… Read more
Price Dynamics and Liquidity of Exchange-Traded Funds
Ananth Madhavan Exchange traded funds (ETFs) have grown substantially in diversity, market significance and size in recent years. As a consequence, there is increased interest by practitioners in the pricing and trading of these investment vehicles. This paper develops a model to examine ETF price discovery and premium dynamics, and estimates the model individually for… Read more
PRACTITIONER’S DIGEST
Volume 13, Number 1, First Quarter 2015 View PDF… Read more
Impact of Credit Markets on Dynamic Stochastic Real Aggregate Production
Volume 13, Number 1, First Quarter 2015 Thomas S. Y. Ho and Sang Bin Lee This paper provides a dynamic stochastic macro-financial model that describes the impact of the credit market on real production risk and provides some empirical evidence of the reasonableness of the model. Our model shows that the uncertain real sector output… Read more
CASE STUDIES: Cobb-Douglas
Volume 13, Number 1, First Quarter 2015 Jack L. Treynor View PDF… Read more
INSIGHTS: Investment, Financial System, Real Output and Macro-Risk Management
Volume 13, Number 1, First Quarter 2015 Thomas S. Y. Ho and Sang Bin Lee Loan underwriting standards and quantitative easing are examples of macro-risk management tools that affect the financial sector, which in turn affects real sector outputs. And therefore asset returns, real sector outputs, financial sector, and macro-risk management are interrelated. This paper… Read more
BOOK REVIEW: Asset Management: A Systematic Approach to Factor Investing
Volume 13, Number 1, First Quarter 2015 Asset Management: A Systematic Approach to Factor Investing Andrew Ang Reviewed by Bruce Grantier View PDF… Read more
Momentum, Acceleration, and Reversal
Volume 13, Number 1, First Quarter 2015 James X. Xiong and Roger G. Ibbotson This paper studies the impact of accelerated stock price increases on future performance. Accelerated stock price increases are a strong contributor to both poor future performance and a higher probability of reversals. It implies that accelerated growth is not sustainable and… Read more
Investing With Style
Volume 13, Number 1, First Quarter 2015 Clifford S. Asness, Antti Ilmanen, Ronen Israel and Tobias J. Moskowitz Investors are bombarded by a variety of investment strategies from a growing and increasingly complex financial industry, each claiming to improve returns and reduce risk. Amid the clamor, academic research has sifted through the vast landscape and… Read more
OIS Discounting, Interest Rate Derivatives, and the Modeling of Stochastic Interest Rate Spreads
Volume 13, Number 1, First Quarter 2015 John Hull and Alan White Before 2007, derivatives practitioners used a zero curve that was bootstrapped from LIBOR swap rates to provide “risk-free” rates when pricing derivatives. In the last few years, when pricing fully collateralized transactions, practitioners have switched to using a zero curve bootstrapped from overnight… Read more
Reserve Primary: Fools Rush in Where Wise Men Fear to Tread!
Volume 13, Number 1, First Quarter 2015 Ozgur (Ozzy) Akay, Mark D. Griffiths and Drew B. Winters This is a clinical analysis of the demise of the Reserve Primary Fund, the first ever money market fund. Reserve Primary was caught in a perfect storm of its own making when the financial markets went into a… Read more