Tuesday, December 3, 2013

Research Roundup

For the more academically-inclined reader, here is a brief rundown of recent academic papers we have found interesting.  As these are written by others, we do not necessarily agree with or stand by all of their points, so caveat emptor.

Trading Volatility:  At What Cost?  The inventor of the original VIX, Robert Whaley, weighs in on volatility exchange-traded products, which he says are "virtually guaranteed to lose money through time."  See also our papers on the subject.

Lapse-Based Insurance  The authors discuss how life insurance companies "make money on customers that lapse their policies and lose money on those that keep their coverage," noting that "almost 85% of term policies fail to end with a death claim."

Value and Momentum Everywhere  The authors find "consistent value and momentum premia" in eight different asset classes, and study common factors that may determine the profitability of value and momentum trading strategies.  See also Fama and French's recent paper on a similar subject.

Collateralized Commodity Obligations: Modeling and Risk Assessment The authors discuss the drawbacks of extending collateralized debt obligation (CDO) risk assessments on collateralized commodity obligations (CCOs).  CCOs, like CDOs, are fixed income securities.  On the other hand, CCOs use commodity trigger swaps as the underlying assets rather than credit default swaps in CDOs.  The authors "demonstrate the benefit of a data-driven, non-parametric modeling approach to rating CCOs."

Do Absolute-Return Mutual Funds Have Absolute Returns?  The answer, according to the authors, is a resounding 'no'.  In particular, the authors "the universe of absolute-return mutual funds and find no evidence that they deliver positive alpha."  The higher fees, turnover and "significant factor exposure" raise questions about whether these funds should be used at all for investors seeking absolute returns.

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