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Recent Research: Highlights from November 2012

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"The Volume Clock: Insights into the High-Frequency Paradigm"
The Journal of Portfolio Management (Fall 2012)
David Easley, Marcos M. Lopez de Prado, and Maureen O’Hara

Over the last two centuries, technological advantages have allowed some traders to be faster than others. In this article, the authors argue that contrary to popular perception, speed is not the defining characteristic that sets high-frequency trading (HFT) apart. HFT is the natural evolution of a new trading paradigm that is characterized by strategic decisions made in a volume-clock metric. Even if the speed advantage disappears, HFT will evolve to continue exploiting structural weaknesses of low-frequency trading (LFT). LFT practitioners are not defenseless against HFT players, however, and this article offers options that can help them survive and adapt to this new environment.

"Securitization as a Technique, Not a Product"
The Journal of Structured Finance (Fall 2012)
Julian Tucker

Traditionally, securitization has been viewed as a product although it could more properly be described as a financing technique. This article looks at the history and background of securitization since its inception in the early 1980s and discusses why labels can be misleading and, in some instances, dangerous. It addresses the development from “true sale” to “whole business securitization,” including differences between the US Bankruptcy Code and the UK Insolvency Act. It concludes with a brief examination and commentary on the EU Capital Requirements Directive and some of the dangers that arise when regulators stretch a concept too far.

"Measuring Household Financial Risk"
The Journal of Wealth Management (Winter 2012)
Alessandro Bucciol and Marina Stuefer

The authors use US panel data covering the 1999-2009 period to investigate the link between portfolio risk and household characteristics. They find wide heterogeneity of risk, with about 40% of the households not willing to undertake any risk. They also find some regularities: Whatever indicator they take, risk shows a flat age profile and correlates with wealth and income. Alternative risk indicators provide similar insights, although they vary differently over time. In particular, the measure of implicit risk tolerance grew abnormally in 2009–at the beginning of the recent financial crisis.

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