Showing papers by "J.P. Morgan & Co. published in 2010"

Do Hot Hands Exist Among Hedge Fund Managers? An Empirical Evaluation

Abstract: In measuring performance persistence, we use hedge fund style benchmarks. This allows us to identify managers with valuable skills, and also to control for option-like features inherent in returns from hedge fund strategies. We take into account the possibility that reported asset values may be based on stale prices. We develop a statistical model that relates a hedge fund's performance to its decision to liquidate or close in order to infer the performance of a hedge fund that left the database. Although we find significant performance persistence among superior funds, we find little evidence of persistence among inferior funds.

Investment Incentives and Corporate Tax Asymmetries

Abstract: Recent facts on the importance of corporate losses motivate more careful study of the impact of tax incentives for investment on firms that lose money. I model firm investment decisions in a setting featuring financing constraints and carrybacks and carryforwards of operating losses. I estimate investment responses to tax incentives allowing effects to vary with cash flows and taxable status. Results suggest that asymmetries in the corporate tax code could have made recent bonus depreciation tax incentives at most 4% less effective than they would have been if all firms were fully taxable. Cash flows have more important effects on the impact of tax incentives. Recent declines in cash flows would predict a 24% decrease in the effectiveness of bonus depreciation.

The Pathfinder image-guided surgical robot

Abstract: This paper first describes the workflow of the Pathfinder image-guided surgical robot that has been designed to replace the stereotactic frame in neurosurgery, and then details the calibration stages employed in order to achieve submillimetre positioning accuracy of a tool tip. The process uses non-linear parameter identification techniques in conjunction with some procedures for camera calibration, which exploit the fact that the camera is mounted to a calibrated robot arm that executes precise motions.

Accelerating the computation of portfolios of tranched credit derivatives

Abstract: Huge growth in the trading and complexity of credit derivative instruments over the past five years has driven the need for ever more computationally demanding mathematical models. This has led to massive growth in data center compute capacity, power and cooling requirements. We report the results of an on-going joint project between J.P. Morgan and specialist acceleration solutions provider Maxeler Technologies to improve the price-performance for calculating the value and risk of a large complex credit derivatives portfolio. Our results show that valuing tranches of Collateralized Default Obligations (CDOs) on Maxeler accelerated systems is over 30 times faster per cubic foot and per Watt than solutions using standard multi-core Intel Xeon processors. We also report some preliminary results of further work that extends the approach to classes of interest rate derivatives.

Volatility and Dividends Volatility Modelling with Cash Dividends and simple Credit Risk

Abstract: This article shows how to incorporate cash dividends and credit risk into equity derivatives pricing and risk management. In essence, we show that in an arbitrage-free model the stock price process upon default must have the form St = (F ⁄ t i Dt)Xt + Dt where X is a (local) martingale with X0 = 1, the curve F ⁄ is the \risky" forward and D is the ∞oor imposed on the stock price process in the form of appropriately discounted future dividends. This has already been shown in [1]. We show that the method presented is the only such method which is consistent with the assumption of cash dividends and simple credit risk. We discuss the implications for implied volatility, no-arbitrage conditions and we derive a version of Dupire’s formula which handles cash dividend and credit risk properly. We discuss pricing and risk management of European options, PDE methods and in quite some detail variance swaps and related derivatives such as gamma swaps, conditional variance swaps and corridor variance swaps. Indeed, to the our best if our knowledge, this is the flrst article which shows the correct handling of cash dividends when pricing variance swaps.

All eyes on asset quality : microfinance global valuation survey 2010

Abstract: The past year held many challenges for microfinance: not since the Asian crisis of the late 1990s has the sector faced a more difficult economic environment. Yet despite these conditions, most micro-finance institutions (MFIs) proved to be up to the challenge. Beginning in January 2009, MFI portfolio delinquency levels began to deteriorate rapidly, with loans past due over 30 days (portfolio at risk [PAR30]) jumping from a median of 2.2 percent to 4.7 percent during the first five months of 2009, while profitability dropped from a median return on equity (ROE) of nearly 18 percent at year-end 2008 to 6 percent by May 2009. However, since June 2009 delinquency has moderated and profitability levels have come back to stabilize at 4 percent for PAR30 and 10 percent for ROE, respectively. Most MFIs continue to maintain solid reserve and capitalization levels, with equity ratios unchanged from the 18-20 percent range established over the past two years. This occasional paper aims to shed new light on equity valuation trends in microfinance, which must necessarily begin with a detailed examination of how MFIs have coped during the recent economic crisis. Accordingly, the first part of the paper is devoted to MFI asset quality and its impact on microfinance profitability. Next, the authors examine trends in valuation benchmarks for microfinance private equity transactions and analyze the key drivers behind these valuations. This section also delves into the recent growth in transaction volume and valuation multiples in India, which had a particularly active market in 2009. Finally, the authors seek to place the microfinance equity market within the context of the broader equity market, using comparisons with publicly listed low-income financial Institutions (LIFIs) in developing countries.

Effects of the 2003 Dividend Tax Cut : Evidence from Real Estate Investment Trusts

Abstract: Recent literature has estimated that the 2003 dividend tax cut caused a large increase in aggregate dividend payouts, which would imply that dividend taxation creates large efficiency costs relative to the amount of revenue raised. I document that dividend payouts by real estate investment trusts also rose sharply following the tax cut, even though REIT dividends did not qualify for the cut. Using REITs as a control group in a simple difference-in-differences framework produces small and statistically insignificant estimates of the effect of the tax cut on aggregate dividend payouts. I further document that the ratio of dividend payouts to corporate earnings changed little after the tax cut, and that the ratio of dividend payouts to share repurchases fell dramatically. These facts suggest that contemporaneous increases in earnings and investor demand for payouts drove the observed increases in aggregate dividend payouts, with at most a modest role for the tax cut.

Model uncertainty and asset return predictability: an application of Bayesian model averaging

Abstract: We investigate model uncertainty associated with predictive regressions employed in asset return forecasting research. We use simple combination and Bayesian model averaging (BMA) techniques to compare the performance of these forecasting approaches in short-vs. long-run horizons of S&P500 monthly excess returns. Simple averaging involves an equally-weighted averaging of the forecasts from alternative combinations of factors used in the predictive regressions, whereas BMA involves computing the predictive probability that each model is the true model and uses these predictive probabilities as weights in combing the forecasts from different models. From a given set of multiple factors, we evaluate all possible pricing models to the extent, which they describe the data as dictated by the posterior model probabilities. We find that, while simple averaging compares quite favorably to forecasts derived from a random walk model with drift (using a 10-year out-of-sample iterative period), BMA outperforms simple ...

A combinatorial construction of high order algorithms for finding polynomial roots of known multiplicity

Abstract: We construct a family of high order iteration functions for finding polynomial roots of a known multiplicity s. This family is a generalization of a fundamental family of high order algorithms for simple roots that dates back to Schröder’s 1870 paper. It starts with the well known variant of Newton’s method B̂2(x) = x − s · p(x)/p′(x) and the multiple root counterpart of Halley’s method derived by Hansen and Patrick. Our approach demonstrates the relevance and power of algebraic combinatorial techniques in studying rational root-finding iteration functions.

A simple but promisingly more empirically consistent model for stock price and option pricing

Abstract: In this paper, we propose a simple stochastic model for stock price dynamics and option pricing, which not only has the same analyticity as log-normal and Black-Scholes model, but is also possibly more consistent with many phenomenons arising from empirical stock and option markets than many of the well-known existing models. It is another way to model stock price and options under leptokurtic distribution that hopefully can add some new insight or give new ideas to improve stock and option valuation. Copyright © 2010 Wilmott Magazine Ltd.

Capital Gains Overhang and the Earnings Announcement Volume Premium

Abstract: This study examined why stocks that experience high abnormal trading volume around earnings announcements earn high returns. The high returns of high-volume stocks appear to be associated with selling pressure that is independent of fundamentals and that comes from a subset of investors who base their selling decisions on the magnitude of unrealized capital gains or losses. Supplementary evidence based on account-level data from a U.S. brokerage firm suggests extra selling pressure for stocks with large capital losses around earnings announcements. These patterns also suggest that the conventional interpretation of the disposition effect may not hold for stocks with large, unrealized capital losses around earnings announcements.

Hedging Pure Endowments with Mortality Derivatives

Abstract: In recent years, a market for mortality derivatives began developing as a way to handle systematic mortality risk, which is inherent in life insurance and annuity contracts. Systematic mortality risk is due to the uncertain development of future mortality intensities, or {\it hazard rates}. In this paper, we develop a theory for pricing pure endowments when hedging with a mortality forward is allowed. The hazard rate associated with the pure endowment and the reference hazard rate for the mortality forward are correlated and are modeled by diffusion processes. We price the pure endowment by assuming that the issuing company hedges its contract with the mortality forward and requires compensation for the unhedgeable part of the mortality risk in the form of a pre-specified instantaneous Sharpe ratio. The major result of this paper is that the value per contract solves a linear partial differential equation as the number of contracts approaches infinity. One can represent the limiting price as an expectation under an equivalent martingale measure. Another important result is that hedging with the mortality forward may raise or lower the price of this pure endowment comparing to its price without hedging, as determined in Bayraktar et al. [2009]. The market price of the reference mortality risk and the correlation between the two portfolios jointly determine the cost of hedging. We demonstrate our results using numerical examples.

A New Heston Based Stochastic Volatility Model for Stock Price and Option Pricing

Abstract: In this paper, we propose a new Heston based stochastic volatility model for stock price and option pricing, which not only captures the volatility smile, but also naturally captures the stochastic volatility of volatility. It’s more empirically consistent to both historical stock price and equity option market than many existed models. It’s especially promising to price Equity cliquet products or credit-equity hybrid products and may shed some light on credit-equity relative value trading strategy.

Short Selling Around Corporate Acquisitions

Abstract: Using daily short sale transactions data for firms traded in the Taiwan Stock Exchange (TWSE) from January 1991 to January 2007, we examine the pattern of short selling trading prior to 338 acquisition announcements. Consistent with the view that short sellers act as informed traders, we find that they have the ability to predict and time their trades prior to significant negative acquisition announcements. Specifically, our evidence shows that abnormal short selling prior to acquisition announcements is significantly associated with negative (bad acquisition news) post-announcement abnormal returns. The empirical results also show that short sellers act as specialized monitors who generate and release value-relevant information to the stock market prior to actual bad acquisition events. In addition, we find that short selling is driven by speculative rather than hedging motives. Robustness checks and the undertaking of alternative tests show that daily changes in short sales transactions lead future stock prices, consistent with the notion that the information advantage of short sellers broadens the informational efficiency of stock prices.