Cutting-Edge Innovations in Derivatives Pricing, Hedging
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THE CASE of CLOS Efraim Benmelech Jennifer Dlugosz Victoria
NBER WORKING PAPER SERIES SECURITIZATION WITHOUT ADVERSE SELECTION: THE CASE OF CLOS Efraim Benmelech Jennifer Dlugosz Victoria Ivashina Working Paper 16766 http://www.nber.org/papers/w16766 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 2011 We thank Paul Gompers, Jeremy Stein, Greg Nini, Gary Gorton, Charlotte Ostergaard, James Vickery, Paul Willen, seminar participants at the Federal Reserve Bank of New York, the Federal Reserve Board, Harvard University, UNC, London School of Economics, Wharton, University of Florida, Berkeley, NERA, the World Bank, the Brattle Group, and participants at the American Finance Association annual meeting, the Yale Conference on Financial Crisis, and Financial Intermediation Society Annual Meeting for helpful comments. Jessica Dias and Kate Waldock provided excellent research assistance. We acknowledge research support from the Division of Research at Harvard Business School. We are especially grateful to Markit for assisting us with CDS data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2011 by Efraim Benmelech, Jennifer Dlugosz, and Victoria Ivashina. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Securitization without Adverse Selection: The Case of CLOs Efraim Benmelech, Jennifer Dlugosz, and Victoria Ivashina NBER Working Paper No. -
What Happened to the Quants in August 2007?∗
What Happened To The Quants In August 2007?∗ Amir E. Khandaniy and Andrew W. Loz First Draft: September 20, 2007 Latest Revision: September 20, 2007 Abstract During the week of August 6, 2007, a number of high-profile and highly successful quan- titative long/short equity hedge funds experienced unprecedented losses. Based on empir- ical results from TASS hedge-fund data as well as the simulated performance of a specific long/short equity strategy, we hypothesize that the losses were initiated by the rapid un- winding of one or more sizable quantitative equity market-neutral portfolios. Given the speed and price impact with which this occurred, it was likely the result of a sudden liqui- dation by a multi-strategy fund or proprietary-trading desk, possibly due to margin calls or a risk reduction. These initial losses then put pressure on a broader set of long/short and long-only equity portfolios, causing further losses on August 9th by triggering stop-loss and de-leveraging policies. A significant rebound of these strategies occurred on August 10th, which is also consistent with the sudden liquidation hypothesis. This hypothesis suggests that the quantitative nature of the losing strategies was incidental, and the main driver of the losses in August 2007 was the firesale liquidation of similar portfolios that happened to be quantitatively constructed. The fact that the source of dislocation in long/short equity portfolios seems to lie elsewhere|apparently in a completely unrelated set of markets and instruments|suggests that systemic risk in the hedge-fund industry may have increased in recent years. -
What Do Fund Flows Reveal About Asset Pricing Models and Investor Sophistication?
What do fund flows reveal about asset pricing models and investor sophistication? Narasimhan Jegadeesh and Chandra Sekhar Mangipudi☆ Goizueta Business School Emory University January, 2019 ☆Narasimhan Jegadeesh is the Dean’s Distinguished Professor at the Goizueta Business School, Emory University, Atlanta, GA 30322, ph: 404-727-4821, email: [email protected]., Chandra Sekhar Mangipudi is a Doctoral student at Emory University, email: [email protected] . We would like to thank Jonathan Berk, Kent Daniel, Amit Goyal, Cliff Green, Jay Shanken, and the seminar participants at the 2018 SFS Cavalcade North America, Louisiana State University and Virginia Tech for helpful discussions, comments, and suggestions. What do fund flows reveal about asset pricing models and investor sophistication? Recent literature uses the relative strength of the relation between fund flows and alphas with respect to various multifactor models to draw inferences about the best asset pricing model and about investor sophistication. This paper analytically shows that such inferences are tenable only under certain assumptions and we test their empirical validity. Our results indicate that any inference about the true asset pricing model based on alpha-flow relations is empirically untenable. The literature uses a multifactor model that includes all factors as the benchmark to assess investor sophistication. We show that the appropriate benchmark excludes some factors when their betas are estimated from the data, but even with this benchmark the rejection of investor sophistication in the literature is empirically tenable. An extensive literature documents that net fund flows into mutual funds are driven by funds’ past performance. For example, Patel, Zeckhauser, and Hendricks (1994) document that equity mutual funds with bigger returns attract more cash inflows and they offer various behavioral explanations for this phenomenon. -
Speaker Biographies
The Quantitative Revolution and the Crisis: How Have Quantitative Financial Models Been Used and Misused Speaker Biographies Hugh Patrick is Director of the Center on Japanese Economy and Business at Columbia Business School, co-director of Columbia’s APEC Study Center, and R.D. Calkins Professor of International Business Emeritus. He joined the Columbia faculty in 1984 after some years as Professor of Economics and Director of the Economic Growth Center at Yale University. He has been a visiting professor at Hitotsubashi University, University of Tokyo, and University of Bombay. Professor Patrick has been awarded Guggenheim and Fulbright fellowships and the Ohira Prize. His professional publications include sixteen books and some sixty articles and essays. He is on the Board of Directors of the U.S. Asia Pacific Council and is a member of the Council of Foreign Relations. In November 1994, the Government of Japan awarded him the Order of the Sacred Treasure, Gold and Silver Star (KunnitôZuihôshô). He completed his B.A. at Yale University in 1951, earned M.A. degrees in Japanese Studies (1955) and Economics (1957) and a Ph.D. in Economics at the University of Michigan in 1960. Bruce Kogut is the Sanford C. Bernstein & Co. Professor of Leadership and Ethics and director of the Sanford C. Bernstein Center for Leadership and Ethics at Columbia Business School. He received his Ph.D. from the MIT Sloan School of Management and holds an honorary doctorate from the Stockholm School of Economics. Previously, he was on the faculties of the Wharton School of the University of Pennsylvania and INSEAD, and he has been a research fellow and visiting professor at the Rand Corporation, École Polytechnique, Social Science Research Center Berlin, Stockholm School of Economics, among others. -
Skin Or Skim? Inside Investment and Hedge Fund Performance
Skin or Skim?Inside Investment and Hedge Fund Performance∗ Arpit Guptay Kunal Sachdevaz September 7, 2017 Abstract Using a comprehensive and survivor bias-free dataset of US hedge funds, we docu- ment the role that inside investment plays in managerial compensation and fund per- formance. We find that funds with greater investment by insiders outperform funds with less “skin in the game” on a factor-adjusted basis, exhibit greater return persis- tence, and feature lower fund flow-performance sensitivities. These results suggest that managers earn outsize rents by operating trading strategies further from their capac- ity constraints when managing their own money. Our findings have implications for optimal portfolio allocations of institutional investors and models of delegated asset management. JEL classification: G23,G32,J33,J54 Keywords: hedge funds, ownership, managerial skill, alpha, compensation ∗We are grateful to our discussant Quinn Curtis and for comments from Yakov Amihud, Charles Calomiris, Kent Daniel, Colleen Honigsberg, Sabrina Howell, Wei Jiang, Ralph Koijen, Anthony Lynch, Tarun Ramado- rai, Matthew Richardson, Paul Tetlock, Stijn Van Nieuwerburgh, Jeffrey Wurgler, and seminar participants at Columbia University (GSB), New York University (Stern), the NASDAQ DRP Research Day, the Thirteenth Annual Penn/NYU Conference on Law and Finance, Two Sigma, IRMC 2017, the CEPR ESSFM conference in Gerzensee, and the Junior Entrepreneurial Finance and Innovation Workshop. We thank HFR, CISDM, eVestment, BarclaysHedge, and Eurekahedge for data that contributed to this research. We gratefully acknowl- edge generous research support from the NYU Stern Center for Global Economy and Business and Columbia University. yNYU Stern School of Business, Email: [email protected] zColumbia Business School, Email: [email protected] 1 IIntroduction Delegated asset managers are commonly seen as being compensated through fees imposed on outside investors. -
FT PARTNERS RESEARCH 2 Fintech Meets Alternative Investments
FT PARTNERS FINTECH INDUSTRY RESEARCH Alternative Investments FinTech Meets Alternative Investments Innovation in a Burgeoning Asset Class March 2020 DRAFT ©2020 FinTech Meets Alternative Investments Alternative Investments FT Partners | Focused Exclusively on FinTech FT Partners’ Advisory Capabilities FT Partners’ FinTech Industry Research Private Capital Debt & Raising Equity Sell-Side / In-Depth Industry Capital Buy-Side Markets M&A Research Reports Advisory Capital Strategic Structuring / Consortium Efficiency Proprietary FinTech Building Advisory FT Services FINTECH Infographics Partners RESEARCH & Board of INSIGHTS Anti-Raid Advisory Directors / Advisory / Monthly FinTech Special Shareholder Committee Rights Plans Market Analysis Advisory Sell-Side Valuations / LBO Fairness FinTech M&A / Financing Advisory Opinion for M&A Restructuring Transaction Profiles and Divestitures Named Silicon Valley’s #1 FinTech Banker Ranked #1 Most Influential Person in all of Numerous Awards for Transaction (2016) and ranked #2 Overall by The FinTech in Institutional Investors “FinTech Excellence including Information Finance 40” “Deal of the Decade” • Financial Technology Partners ("FT Partners") was founded in 2001 and is the only investment banking firm focused exclusively on FinTech • FT Partners regularly publishes research highlighting the most important transactions, trends and insights impacting the global Financial Technology landscape. Our unique insight into FinTech is a direct result of executing hundreds of transactions in the sector combined with over 18 years of exclusive focus on Financial Technology FT PARTNERS RESEARCH 2 FinTech Meets Alternative Investments I. Executive Summary 5 II. Industry Overview and The Rise of Alternative Investments 8 i. An Introduction to Alternative Investments 9 ii. Trends Within the Alternative Investment Industry 23 III. Executive Interviews 53 IV. -
Paul Wilmott Introduces Quantitative Finance
Paul Wilmott Introduces Quantitative Finance Second Edition Paul Wilmott Introduces Quantitative Finance Second Edition www.wilmott.com Copyright ≤ 2007 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England Telephone (+44) 1243 779777 Email (for orders and customer service enquiries): [email protected] Visit our Home Page on www.wiley.com Copyright ≤ 2007 Paul Wilmott All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP, UK, without the permission in writing of the Publisher. Requests to the Publisher should be addressed to the Permissions Department, John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England, or emailed to [email protected], or faxed to (+44) 1243 770620. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The Publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the Publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. -
Stronger Together
MAKING STONY BROOK STRONGER, TOGETHER From state-of-the-art healthcare facilities for STONY BROOK CHILDREN’S HOSPITAL EMERGENCY DEPARTMENT EXPANSION GOAL MET Long Island’s children to Joining dozens of community friends, three Knapp foundations help complete $10 million investments in the greatest philanthropic goal minds in medicine and in Since it opened in 2010, Stony Brook Children’s Pediatric Emergency Department has seen a 50 percent increase in patient volume, creating our remarkable students an emergency of its own: an urgent need for more space, specialists and services to care for the 25,000 children seen each year. and programs, you make Now, thanks to two dozen area families, and a collective $4 million gift from the Knapp Swezey, Gardener and Island Outreach foundations, us stronger in every way. Stony Brook Children’s is one step closer to creating an expanded pediatric emergency facility to serve Suffolk County’s children and the families who love them. “The Pediatric Emergency Department has been a remarkably successful program in terms of the quality of care we’re providing and how it’s resonated with the community,” said Chair of Pediatrics Carolyn Milana, MD. “Now, thanks to the Knapp family foundations and our surrounding community of generous friends and grateful patients, we will be able to move ahead to ensure we can continue to meet the need now and into the future.” “Time and again, the Knapp families and their foundation boards have shown such incredible commitment to the people of Long Island by their personal and philanthropic engagement with Stony Brook,” said Deborah Lowen-Klein, interim vice president for Advancement. -
The Hedge Fund Industry in New York City Alternative Assets
The Facts The Hedge Fund Industry in New York City alternative assets. intelligent data. The Hedge Fund Industry in New York City New York City is home to over a third of all the assets in the hedge fund industry today. We provide a comprehensive overview of the hedge fund industry in New York City, including New York City-based investors’ plans for the next 12 months, the number of hedge fund launches each year, fund terms and conditions, the largest hedge fund managers and performance. Fig. 1: Top 10 Leading Cities by Hedge Fund Assets under Fig. 2: Breakdown of New York City-Based Hedge Fund Management ($bn) (As at 31 December 2014) Investors by Type Manager City Headquarters Assets under Management ($bn) Fund of Hedge Funds Manager New York City 1,024 Foundation 2% London 395 3%3% 6% Private Sector Pension Fund Boston 171 31% Westport 168 8% Family Office Greenwich 164 Endowment Plan San Francisco 87 Wealth Manager Chicago 75 15% Hong Kong 61 Insurance Company 21% Dallas 52 11% Asset Manager Stockholm 39 Other Source: Preqin Hedge Fund Analyst Source: Preqin Hedge Fund Investor Profi les Fig. 3: Breakdown of Strategies Sought by New York City- Fig. 4: Breakdown of Structures Sought by New York City- Based Hedge Fund Investors over the Next 12 Months Based Hedge Fund Investors over the Next 12 Months 60% 100% 97% 50% 90% 50% 80% 40% 70% 31% 30% 26% 60% 20% 19% 50% 13% 11% 40% 9% 9% 10% 7% 7% 30% Proportion of Fund Searches 0% 20% 17% Proportion of Fund Searches 10% 5% Macro 1% Equity Credit 0% Diversified Neutral Long/Short Long/Short Commingled Managed Alternative Listed Fund Arbitrage Event Driven Fixed Income Fixed Opportunistic Equity Market Multi-Strategy Account Mutual Fund Relative Value Source: Preqin Hedge Fund Investor Profi les Source: Preqin Hedge Fund Investor Profi les Fig. -
Natural Language Processing As a Predictive Feature in Financial Forecasting
Natural Language Processing as a Predictive Feature in Financial Forecasting By Jaebin (Jay) Chang Thesis Advisor: Mark Liberman Academic Advisor: Rajeev Alur EAS499 Senior Thesis School of Engineering and Applied Science University of Pennsylvania April 28th 2020 Table of Contents 1. Introduction 2. Understanding the Financial Market a. Efficient Market Hypothesis and Random Walk Hypothesis b. Fundamental Approach vs. Technical Approach 3. Algorithmic Approaches to Financial Forecasting a. Historical Price Based Approach b. Cross-Correlation Based Approach c. Natural Language Processing Based Approach i. Textual Components as Features ii. Sentiment Score as a Feature iii. Business Network Approach 4. Natural Language Processing based Financial Forecasting a. Pre-Processing Set-up i. Technical Analysis and Prediction Window ii. Feature Space Limitation iii. Textual Sources b. Feature Extractions i. Bag of Words ii. Other Textual Representations iii. Sentiment Score c. Processing Algorithms i. Naive Bayesian ii. Support Vector Machine and Regression iii. Decision Rules iv. Other Algorithms d. Performance Evaluation 5. Limitations of NLP based Financial Forecasting 6. Conclusion 2 1. Introduction With no doubt, the stock market serves an important function in the overall economy. It not only works as a source of funds for businesses but also can be a main vehicle of wealth creation for individual and institutional investors. Specially, stocks allow small investors to participate in gains of companies through partial ownership. It is attractive because it generates average returns beyond the inflation rate, also serving as a good means to store wealth. However, it is important to note that the stock market is not the economy itself but rather a good indicator of it. -
David Eisenbud Professorship
For Your Information wife, Marilyn, Simons manages the Simons Foundation, a News from MSRI charitable organization devoted to scientific research. The Simonses live in Manhattan. MSRI Receives Major Gift Simons is president of Renaissance Technologies James H. Simons, mathematician, philanthropist, and Corporation, a private investment firm dedicated to the one of the world’s most successful hedge fund manag- use of mathematical methods. Renaissance presently has ers, announced in May 2007 a US$10 million gift from over US$30 billion under management. Previously he was the Simons Foundation to the Mathematical Sciences Re- chairman of the mathematics department at the State Uni- search Institute (MSRI), the largest single cash pledge in versity of New York at Stony Brook. Earlier in his career he the institute’s twenty-five-year history. The new funding was a cryptanalyst at the Institute of Defense Analyses in is also the largest gift of endowment made to a U.S.-based Princeton and taught mathematics at the Massachusetts institute dedicated to mathematics. Institute of Technology and Harvard University. The monies will create a US$5 million endowed chair, Simons holds a B.S. in mathematics from MIT and a the “Eisenbud Professorship”, named for David Eisenbud, Ph.D. in mathematics from the University of California, director of MSRI, to support distinguished visiting profes- sors at MSRI. The gift comes as Eisenbud nears the end of Berkeley. His scientific research was in the area of geom- his term as MSRI director (from July 1997 to July 2007) and etry and topology. He received the AMS Veblen Prize in as MSRI prepares to celebrate its twenty-fifth anniversary Geometry in 1975 for work that involved a recasting of in the late fall/winter 2007–08. -
A Simple Model for Pricing Securities with Equity, Interest-Rate, and Default Risk∗
A Simple Model for Pricing Securities with Equity, Interest-Rate, and Default Risk∗ Sanjiv R. Das Rangarajan K. Sundaram Santa Clara University New York University Santa Clara, CA 95053 New York, NY 10012. June 2002, November 2003; Current version: October 2004. ∗The authors’ respective e-mail addresses are [email protected], and [email protected]. We owe a huge debt of grati- tude for extensive discussions and correspondence with Suresh Sundaresan and Mehrdad Noorani. We are very grateful for the use of data from CreditMetrics. Our thanks also to Jan Ericsson, Kian Esteghamat, Rong Fan, Gary Geng, and Maxime Popineau for several helpful comments. The paper benefitted from the comments of seminar participants at York University, New York University, University of Oklahoma, Stanford University, Santa Clara University, Universita La Sapienza, Cred- itMetrics, MKMV Corp., the 2003 European Finance Association Meetings in Glasgow, Morgan Stanley, Archeus Capital Management, Lehman Brothers, and University of Massachusetts, Amherst. 1 Equity, Interest-rate, Default Risk . .2 A Simple Model for Pricing Securities with Equity, Interest-Rate, and Default Risk Abstract We develop a model for pricing derivative and hybrid securities whose value may depend on dif- ferent sources of risk, namely, equity, interest-rate, and default risks. In addition to valuing such secu- rities the framework is also useful for extracting probabilities of default (PD) functions from market data. Our model is not based on the stochastic process for the value of the firm, which is unobservable, but on the stochastic processes for interest rates and the equity price, which are observable. The model comprises a risk-neutral setting in which the joint process of interest rates and equity are modeled to- gether with the default conditions for security payoffs.