Recent Research: Highlights from May 2010

"Risk Management Lessons Worth Remembering from the Credit Crisis of 2007–2009"
The Journal of Portfolio Management (Summer 2010). Bennett W. Golub and Conan C. Crum.

This article by Golub and Crum presents six important lessons worth remembering from the credit crisis of 2007–2009.The recent credit crisis revealed the inadequacy of many standard methods in quantitative risk management and called into question the general efficiency of markets. Golub and Crum’s analysis of the six lessons learned provides insights into what went wrong and offers advice on steps that institutions can take to avoid similar failures in the future.The authors present detailed analysis on risk management issues relating to liquidity, securitized products, certification,market risk, and policy risk. 

 
"Multi-Horizon Investing: A New Paradigm for Endowments and Other Long-Term Investors" 
The Journal of Wealth Management (Summer 2010). Robert A. Jaeger, Michael A. Rausch, and Margaret Foley.

Investors do not have a single investment horizon; they have multiple investment horizons at the same time. Every long-term investor is, therefore, also a medium-term investor and a short-term investor. This fact has important implications for asset allocation and portfolio optimization. The total portfolio should be viewed as an aggregation of multiple sub-portfolios, each of which has a different investment horizon. The different sub-portfolios have different investment objectives, different expected returns, different liquidity requirements, and may even be based on different capital market assumptions. The size of each sub-portfolio is determined by the spending requirements of the investor. In this framework, risk is not standard deviation but “expected loss,” that is, the probability of loss (either in nominal terms, after inflation, or after inflation and spending) multiplied by the amount of the loss. 

"Bolstering Home Finance: Reconciling Policy Initiatives and Investor Protections"
The Journal of Structured Finance (Summer 2010). Diane R. Maurice, Charlie Yan, Warren Kwan, and Vineet Gupta.

The current policy initiatives to support housing finance, the Home Affordable Modification Program (HAMP), the Homeowner Affordability and Stability Plan (HASP), and Help for Homeowners (H4H), are expected to counter the lingering impact of the credit crisis on homeowners, but they are also expected to have unintended consequences. As those programs favor homeowners, private investment, a traditionally significant source for housing finance, may be curtailed. This article provides an overview of the policy initiatives, the strategies, and outcomes of the mortgage loan modification programs, and the impact on investors.

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