Measuring portfolio performance using a modified measure of risk

This paper reports the results of an investigation into the properties of a theoretical modification of beta proposed by Leland (1999) and based on earlier work of Rubinstein (1976). It is shown that when returns are elliptically symmetric, beta is the appropriate measure of risk and that there are other situations in which the modified beta will be similar to the traditional measure based on the capital asset pricing model. For the case where returns have a normal distribution, it is shown that the criterion either does not exist or reduces exactly to the conventional beta. It is therefore conjectured that the modified measure will only be useful for portfolios that have nonstandard return distributions which incorporate skewness. For such situations, it is shown how to estimate the measure using regression and how to compare the resulting statistic with a traditional estimated beta using Hotelling's test. An empirical study based on stocks from the FTSE350 does not find evidence to support the use of the new measure even in the presence of skewness.Journal of Asset Management (2007) 7, 388-403. doi:10.1057/palgrave.jam.225005

Debt Maturity and the Liquidity of Secondary Debt Markets

We model the debt maturity choice of firms in the presence of fixed issuance costs in the primary market and search frictions in the secondary market for debt. In the secondary market, short maturities improve the bargaining position of sellers, which reduces the required issuance yield. Long maturities reduce reissuance costs. The optimally chosen maturity trades off both considerations. Equilibrium exhibits inefficiently short maturity choices: An individual firm does not internalize that a longer maturity increases expected gains from trade in the secondary market, which attracts more buyers, and hence also facilitates the sale of debt issued by other firms

Dynamic debt runs and financial fragility: Evidence from the 2007 ABCP crisis

We use the 2007 asset-backed commercial paper (ABCP) crisis as a laboratory to study the determinants of debt runs. Our model features dilution risk: maturing short-term lenders demand higher yields in compensation for being diluted by future lenders, making runs more likely. The model explains the observed tenfold increase in yield spreads leading to runs and the positive relation between yield spreads and future runs. Results from structural estimation show that runs are very sensitive to leverage, asset values, and asset liquidity, but less sensitive to the degree of maturity mismatch, the strength of guarantees, and asset volatility

Matched pairs of human prostate stromal cells display differential tropic effects on LNCaP prostate cancer cells

Prostate stromal cells may play binary roles in the process of prostate cancer development. As the first to be encountered by infiltrating prostate cancer cells, prostate stromal cells form the first defense line against prostate cancer progression and metastasis. However, interaction between prostate cancer and stromal cells may facilitate the formation of a tumor microenvironment favoring cancer cell growth and survival. To establish an experimental system for studying the interaction between cancer and stromal cells, we isolated three matched pairs of normal and cancer-associated human prostate stromal clones. In this report, we describe the morphologic and behavioral characteristics of these cells and their effect on LNCaP prostate cancer cells in co-culture. Unlike LNCaP prostate cancer cells, the isolated prostate stromal clones are large fibroblast-like cells with a slow proliferation rate. Growth and survival of these clones are not affected by androgens. The stromal cells display high resistance to serum starvation, while cancer-associated stromal clones have differentiated survival ability. In co-culture experiments, the stromal cells protected some LNCaP prostate cancer cells from death by serum starvation, and cancer-associated stromal clones showed more protection. This work thus established a panel of valuable human prostate stromal cell lines, which could be used in co-culture to study the interaction between prostate cancer and prostate stromal cells

Option prices under Bayesian learning: implied volatility dynamics and predictive densities

This paper shows that many of the empirical biases of the Black and Scholes option pricing model can be explained by Bayesian learning effects. In the context of an equilibrium model where dividend news evolve on a binomial lattice with unknown but recursively updated probabilities we derive closed-form pricing formulas for European options. Learning is found to generate asymmetric skews in the implied volatility surface and systematic patterns in the term structure of option prices. Data on S&P 500 index option prices is used to back out the parameters of the underlying learning process and to predict the evolution in the cross-section of option prices. The proposed model leads to lower out-of-sample forecast errors and smaller hedging errors than a variety of alternative option pricing models, including Black-Scholes and a GARCH model