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The CrossSection of Foreign Currency Risk Premia and consumption growth risk
 AMERICAN ECONOMIC REVIEW
, 2006
"... Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate differential and why high interest rate currencies do not depreciate as much as the interest rate differential. Domestic investors earn negative excess returns on low interest r ..."
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Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate differential and why high interest rate currencies do not depreciate as much as the interest rate differential. Domestic investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rate currency portfolios. Because high interest rate currencies depreciate on average when domestic consumption growth is low and low interest rate currencies appreciate under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk.
Public Pension Promises: How Big Are They and What Are They Worth?” Journal of Finance, forthcoming
, 2011
"... We calculate the present value of state employee pension liabilities using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities bas ..."
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Cited by 18 (1 self)
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We calculate the present value of state employee pension liabilities using discount rates that reflect the risk of the payments from a taxpayer perspective. If benefits have the same default and recovery characteristics as state general obligation debt, the national total of promised liabilities based on current salary and service is $3.20 trillion. If pensions have higher priority than state debt, the value of liabilities is much larger. Using zerocoupon Treasury yields, which are defaultfree but contain other priced risks, promised liabilities are $4.43 trillion. Liabilities are even larger under broader concepts that account for salary growth and future service.
A Brief History of Market Efficiency
 European Financial Management
, 1998
"... Every finance professional employs the concept of market efficiency. The theory, evidence and counterevidence focus on a couple of dozen highly influential articles published during the twentieth century. We summarise the origins of and interlinkages between these contributions to the history of fin ..."
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Cited by 10 (0 self)
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Every finance professional employs the concept of market efficiency. The theory, evidence and counterevidence focus on a couple of dozen highly influential articles published during the twentieth century. We summarise the origins of and interlinkages between these contributions to the history of finance.
PORTFOLIO SELECTION USING TIKHONOV FILTERING TO ESTIMATE THE COVARIANCE MATRIX
"... Abstract. Markowitz’s portfolio selection problem chooses weights for stocks in a portfolio based on a covariance matrix of stock returns. Our study proposes to reduce noise in the estimated covariance matrix using a Tikhonov filter function. In addition, we propose a new strategy to resolve the ran ..."
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Abstract. Markowitz’s portfolio selection problem chooses weights for stocks in a portfolio based on a covariance matrix of stock returns. Our study proposes to reduce noise in the estimated covariance matrix using a Tikhonov filter function. In addition, we propose a new strategy to resolve the rank deficiency of the covariance matrix, and a method to choose a Tikhonov parameter which determines a filtering intensity. We put the previous estimators into a common framework and compare their filtering functions for eigenvalues of the correlation matrix. Experiments using the daily return data of the most frequently traded stocks in NYSE, AMEX, and NASDAQ show that Tikhonov filtering estimates the covariance matrix better than methods of Sharpe who applies a marketindex model, Ledoit et al. who shrink the sample covariance matrix to the marketindex covariance matrix, Elton and Gruber, who suggest truncating the smallest eigenvalues, Bengtsson and Holst, who decrease small eigenvalues at a single rate, and Plerou et al. and Laloux et al., who use a random matrix approach. Key words. Tikhonov regularization, covariance matrix estimate, Markowitz portfolio selection, ridge regression 1. Introduction. A
Geometric Mean Maximization: An Overlooked Portfolio Approach?
"... Academics and practitioners usually optimize portfolios on the basis of mean and variance. They set the goal of maximizing riskadjusted returns measured by the Sharpe ratio and thus determine their optimal exposures to the assets considered. However, there is an alternative criterion that has an eq ..."
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Academics and practitioners usually optimize portfolios on the basis of mean and variance. They set the goal of maximizing riskadjusted returns measured by the Sharpe ratio and thus determine their optimal exposures to the assets considered. However, there is an alternative criterion that has an equally plausible underlying idea; geometric mean maximization aims to maximize the growth of the capital invested, thus seeking to maximize terminal wealth. This criterion has several attractive properties and is easy to implement, and yet it does not seem to be very widely used by practitioners. The ultimate goal of this article is to explore potential empirical reasons that may explain why this is the case. The data, however, does not seem to suggest any clear answer, and, therefore, the question posed in the title remains largely unanswered: Are practitioners overlooking a useful criterion?
Default Probabilities and Risk Sensitivities
, 2009
"... The content of this paper reflects the personal view of the author. In particular, it does not necessarily ..."
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The content of this paper reflects the personal view of the author. In particular, it does not necessarily
This title is brought to you by the Upjohn Institute. For more information, please contact ir@upjohn.org. An Analysis of RiskTaking Behavior for Public Defined Benefit Pension Plans
, 2011
"... This paper investigates the determinants of public pension plan risktaking behavior using the percentage of total plan assets invested in the equity markets and the pension asset beta as measures of investment risk. We find that government accounting standards strongly affect public fund investment ..."
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This paper investigates the determinants of public pension plan risktaking behavior using the percentage of total plan assets invested in the equity markets and the pension asset beta as measures of investment risk. We find that government accounting standards strongly affect public fund investment risk, as higher return assumptions (used to discount pension liabilities) are associated with higher equity allocation and beta. Unlike private pension plans, public funds undertake more risk if they are underfunded and have lower investment returns in the previous years, consistent with the risk transfer hypothesis. Furthermore, pension funds in states facing financial constraints allocate more assets to equity and have higher pension asset betas. There also appears to be a herding effect in that a change in CalPERS portfolio beta or equity allocation is mimicked by other pension funds. Finally, the results offer mild support of a public union effect. JEL Codes:
History of the Efficient Market Hypothesis
, 2011
"... A market is said to be efficient with respect to an information set if the price ‘fully reflects ’ that information set, i.e. if the price would be unaffected by revealing the information set to all market participants. The efficient market hypothesis (EMH) asserts that financial markets are efficie ..."
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A market is said to be efficient with respect to an information set if the price ‘fully reflects ’ that information set, i.e. if the price would be unaffected by revealing the information set to all market participants. The efficient market hypothesis (EMH) asserts that financial markets are efficient. On the one hand, the definitional ‘fully ’ is an exacting requirement, suggesting that no real market could ever be efficient, implying that the EMH is almost certainly false. On the other hand, economics is a social science, and a hypothesis that is asymptotically true puts the EMH in contention for one of the strongest hypotheses in the whole of the social sciences. Strictly speaking the EMH is false, but in spirit is profoundly true. Besides, science concerns seeking the best hypothesis, and until a flawed hypothesis is replaced by a better hypothesis, criticism is of limited value. Starting in the 16th century, this note gives a chronological review of the notable literature relating to the EMH. History of the Efficient Market Hypothesis
Asset Pricing Model
, 2004
"... Scienti¯c Research (FNRS). Part of this research was completed while I was visiting HEC Montr¶eal. All errors Although the Treynor ratio has several indisputable advantages over Jensen's alpha, it has never been adapted in a multiindex setup. The Generalized Treynor Ratio de¯ned as the abnorma ..."
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Scienti¯c Research (FNRS). Part of this research was completed while I was visiting HEC Montr¶eal. All errors Although the Treynor ratio has several indisputable advantages over Jensen's alpha, it has never been adapted in a multiindex setup. The Generalized Treynor Ratio de¯ned as the abnormal return of a portfolio per unit of weightedaverage systematic risk and standardized by the required return on the benchmark portfolio is the simplest expression that preserves the same key geometric and analytical properties as the original Treynor ratio. Numerical simulations as well as empirical evidence reveal that this measure dominates Jensen's alpha and the Information Ratio in terms of robustness to changes in benchmarks (accuracy) and in asset pricing speci¯cations (consistency).The Generalized Treynor Ratio 1.