"Index Volatility in Perspective" The Journal of Index Investing (Summer 2010). Joanne M. Hill.
As the number of indexes and index-based investment products expands, it is critical for investors to understand relative index volatility. This article discusses the issues to consider when evaluating index risk and shares insights and data from the author’s recent historical index volatility analysis. The research evaluates the risk of index exposure from multiple perspectives—over time and on a relative basis—and encompasses U.S. equity, global equity, U.S. sector, U.S. Treasury, and select commodity market indexes. Specifically, the author explores how time dimension affects perception and assessment of risk, the cyclicality of volatility measures, patterns that may signal a future shift in risk, how index volatility measures trend compared to index return measures, and how index volatility behaves above and below the median, as well as under increasing levels of risk. Based on this research, the author shares several important insights, including the observation that risk can suddenly shift well above median levels for a given index, and those shifts often occur simultaneously across multiple indexes. As a result, significant short-term value changes may occur if portfolios are not modified to reduce risk when the inherent volatility of indexes rises. Alternatively, heightened risk may also present tactical investment opportunities for investors who have an ability to anticipate directional index moves.
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A great deal of attention has recently been devoted to examining trends in the housing market and to predicting possible outcomes of the recession. If housing is at the center of the current storm, how soon will recovery in this sector offer the rest of the economy some shelter from the nasty weather? Inevitably, stabilization in the real estate market has to be achieved through reestablishing the broken link between real values and market prices.
Continue reading "Safe House: The Housing Market and the End of the Recession" »
"A Valuation Study of Stock Market Seasonality and the Size Effect."
The Journal of Portfolio Management, Spring 2010. Zhiwu Chen and Jan Jindra.
Existing studies on market seasonality and the size effect are largely based on realized returns. In this article, Chen and Jindra investigate seasonal variations and size-related differences in a cross-stock valuation distribution. They use three stock valuation measures, two derived from structural models and one from the book-to-market ratio. The authors find that the average valuation level is highest in mid-summer and lowest in mid-December. Furthermore, the valuation dispersion (kurtosis) across stocks increases toward year-end and reverses direction after the turn of the year, suggesting increased movements in both the underand overvaluation directions. Among size groups, small-cap stocks exhibit the sharpest decline in valuation from June to December and the highest rise from December to January. For most months, small-cap stocks have the lowest valuation among all size groups and show the widest cross-stock valuation dispersion, meaning that they are also the hardest to value. Overall, large-cap stocks enjoy the highest valuation uniformity and are the least subject to valuation seasonality.
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"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.
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Recent work by Cornelia Betsch (Center for Empirical Research in Economics and Behavioral Sciences—CEREB, University of Erfurt, Nordhaeuser Strasse 63, D-99089, Erfurt, Germany) suggests some interesting findings regarding strategies used to make a choice. Several key points of this research are as follows.
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David Tuckett and Richard Taffler have an interesting paper recently published in the International Journal of Psychoanalysis entitled “Phantastic Objects and the Financial Market’s Sense of Reality: A Psychoanalytic Contribution to the Understanding of Stock Market Instability.” The article suggests that in the context of uncertainty and ambiguity, emotions and states of mind determine the way information about reality is processed. Three questions are posed as follows:
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