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Things worth reading: 11th May 2012

May 11, 2012 by skinnercm   Comments (0)

Things we're reading today include ...

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Blog Post: TheAlephBlog: Yahoo Finance News

May 11, 2012 by MoneyScience   Comments (0)

I want to call attention to News at Yahoo Finance.  I have used Yahoo Finance for 15 years and have found it valuable.  As time has gone on, Yahoo has added low value news sources like Seeking Alpha, Motley Fool, and Zacks.  These are websites that if I could eliminate them, it would be done already.read more...

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Blog Post: Falkenblog: Asness and Frazzini Make Simple Point on Value

May 11, 2012 by MoneyScience   Comments (0)

Cliff Asness has been thinking, writing, and investing on value and momentum ideas since the late 1990's, and as the head of a successful hedge fund, it's fair to say he's one of the world's foremost experts on these equity factors. He and Andrea Frazzini recently put up a The Devil in HML's Details on the SSRN, so this is all new to me even though it has been around for a year elsewhere (strangely, there are more downloads than abstract views). Here's the finding. Value, as...

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Published / Preprint: Optimal retirement consumption with a stochastic force of mortality. (arXiv:1205.2295v1 [q-fin.RM])

May 11, 2012 by MoneyScience   Comments (0)

We extend the lifecycle model (LCM) of consumption over a random horizon (a.k.a. the Yaari model) to a world in which (i.) the force of mortality obeys a diffusion process as opposed to being deterministic, and (ii.) a consumer can adapt their consumption strategy to new information about their mortality rate (a.k.a. health status) as it becomes available. In particular, we derive the optimal consumption rate and focus on the impact of mortality rate uncertainty vs. simple lifetime uncertainty...

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Published / Preprint: Electricity price modeling and asset valuation: a multi-fuel structural approach. (arXiv:1205.2299v1 [q-fin.PR])

May 11, 2012 by MoneyScience   Comments (0)

We introduce a new and highly tractable structural model for spot and derivative prices in electricity markets. Using a stochastic model of the bid stack, we translate the demand for power and the prices of generating fuels into electricity spot prices. The stack structure allows for a range of generator efficiencies per fuel type and for the possibility of future changes in the merit order of the fuels. The derived spot price process captures important stylized facts of historical electricity...

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Published / Preprint: The Valuation of Clean Spread Options: Linking Electricity, Emissions and Fuels. (arXiv:1205.2302v1 [q-fin.PR])

May 11, 2012 by MoneyScience   Comments (0)

The purpose of the paper is to present a new pricing method for clean spread options, and to illustrate its main features on a set of numerical examples produced by a dedicated computer code. The novelty of the approach is embedded in the use of structural models as opposed to reduced-form models which fail to capture properly the fundamental dependencies between the economic factors entering the production process.

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Published / Preprint: Risk-Neutral Pricing of Financial Instruments in Emission Markets: A Structural Approach. (arXiv:1011.3736v2 [q-fin.PR] UPDATED)

May 11, 2012 by MoneyScience   Comments (0)

We present a novel approach to the pricing of financial instruments in emission markets, for example, the EU ETS. The proposed structural model is positioned between existing complex full equilibrium models and pure reduced form models. Using an exogenously specified demand for a polluting good it gives a causal explanation for the accumulation of CO2 emissions and takes into account the feedback effect from the cost of carbon to the rate at which the market emits CO2. We derive a...

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Forecast Expected Return Week in Review

May 10, 2012 by tigergb   Comments (0)

Alpha Generation and Risk Smoothing using Volatility of Volatility: We put forward a framework that produces a formulain which returns become a function of volatility and therefore become somewhat morepredictable. We show that this strategy produces excess returns giving us the upside of leverage without the downside.

The Cross Section of Expected Returns with MIDAS Betas: This paper employs mixed data sampling (MIDAS) to estimate a portfolio’s conditional beta with the market and with alternative risk factors. We show that beta estimates under MIDAS present lower mean absolute forecasting errors and generate a better out-of-sample performance of the optimized portfolios relative to OLS betas.

Online resources for handling big data and parallel computing in R: links to online documents and slides on handling big data and parallel computing in R.

The Worlds Richest Hedge Fund Managers Exposed: how much do the Worlds richest hedge fund managers make?
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Read the full post at Forecast Expected Return Week in Review.

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