Optimal Bond Trading with Personal Taxes: Implications for Bond Prices and Estimated Tax Brackets and Yield Curves

The assumption that bondholders follow either a buy-and-hold or a continuous realization trading policy, rather than the optimal trading policy,is at variance with reality and, as we demonstrate, may seriously bias the estimation of the yield curve and the implied tax bracket of the marginal investor. Tax considerations which govern a bondholder's optimal trading policy include the following: realization of capital losses, short term if possible; deferment of the realization of capital gains, especially if they are short term; changing the holding period status from long term to short term by sale of the bond and repurchase, so that future capital losses may be realized short term; and raising the basis through sale of the bond and repurchase in order to deduct from ordinary income the amortized premium. Because of the interaction of these factors, no simple characterization of the optimal trading policy is possible. We can say, however, that it differs substantially from the buy-and-hold policy irrespective of whether the bondholder is a bank, a bond dealer, or an individual. We obtain these strong results even when we allow for transactions costs and explicitly consider numerous IRS regulations designed to curtail tax avoidance.

Sharpening Sharpe Ratios

It is now well known that the Sharpe ratio and other related reward-to-risk measures may be manipulated with option-like strategies. In this paper we derive the general conditions for achieving the maximum expected Sharpe ratio. We derive static rules for achieving the maximum Sharpe ratio with two or more options, as well as a continuum of derivative contracts. The optimal strategy rules for increasing the Sharpe ratio. Our results have implications for performance measurement in any setting in which managers may use derivative contracts. In a performance measurement setting, we suggest that the distribution of high Sharpe ratio managers should be compared with that of the optimal Sharpe ratio strategy. This has particular application in the hedge fund industry where use of derivatives is unconstrained and manager compensation itself induces a non-linear payoff. The shape of the optimal Sharpe ratio leads to further conjectures. Expected returns being held constant, high Sharpe ratio strategies are, by definition, strategies that generate regular modest profits punctunated by occasional crashes. Our evidence suggests that the 'peso problem' may be ubiquitous in any investment management industry that rewards high Sharpe ratio managers.

High Water Marks

Incentive fees for money managers are frequently accompanied by high-water mark provisions that condition the payment of the performance fee upon exceeding the previously achieved maximum share value. In this paper, we show that hedge fund performance fees are valuable to money managers, and conversely, represent a claim on a significant proportion of investor wealth. The high-water mark provisions in these contracts limit the value of the performance fees. We provide a closed-form solution to the cost of the high-water mark contract under certain conditions. Our results provide a framework for valuation of a hedge fund management company.

Realization Utility with Reference-Dependent Preferences

We develop a tractable model of realization utility that studies the role of reference-dependent S-shaped preferences in a dynamic investment setting with reinvestment. Our model generates both voluntarily realized gains and losses. It makes specific predictions about the volume of gains and losses, the holding periods, and the sizes of both realized and paper gains and losses that can be calibrated to a variety of statistics, including the Odean measure of the disposition effect. Our model also predicts several anomalies including, among others, the flattening of the capital market line and a negative price for idiosyncratic risk.Comment: appears in The Review of Financial Studies (2013

Valuing reload options

Abstract Over the past quarter century, the use of stock options as pay for performance has grown enormously. Option grants now account for 32% of CEO pay-more than twice that of salaries. In addition options are now being granted to many more employees than before. During this same time period, there have been numerous innovations in the features on compensation options. One of these features is the reload-the grant of new options to replace shares tendered in the payment of the exercise. Within the past year, the long-delayed FASB requirement that options be expensed for financial reporting has finally become a fact. It is incumbent upon financial researchers to provide methods to achieve the goal of valuing options, not only to serve the accounting needs, but also to provide ways of determining their true costs and incentive effects. This paper analyzes the various forms of reload options and provides simple BlackScholes like formulas for evaluating them

The Bubble Bursts: The 2015 Opt-Out Movement in New Jersey

"The Bubble Bursts: The 2015 Opt-Out Movement in New Jersey" analyzes the scope, factors, and context of the opt-out movement that occurred in New Jersey in the spring of 2015. Using test participation data released in February 2016 by the New Jersey Department of Education, we found that approximately 135,000 students did not take the state assessment in the spring of 2015. Depending on how it was calculated, this represented between 11-19% of the population of students eligible for testing in grades 3 to 11 in the state. There was also a positive correlation between higher district opt-out rates and wealthier districts. We found that several factors contributed to these trends. Predominant amongst these were an accumulated skepticism with high stakes testing in general and the new PARCC assessment in particular, concerns from the Common Core State Standards rollout, teacher union opposition to premature teacher accountability, and confusion in the messages of state policymakers about graduation requirements. These explanatory factors were based upon interviews with over 30 state policymakers, professional education association representatives, advocacy group leaders, school administrators, teachers, parents, and students

The Bubble Bursts: The 2015 Opt-Out Movement in New Jersey

The Bubble Bursts: The 2015 Opt-Out Movement in New Jersey analyzes the scope, factors, and context of the opt-out movement that occurred in New Jersey in the spring of 2015. Using test participation data released in February 2016 by the New Jersey Department of Education, we found that approximately 135,000 students did not take the state assessment in the spring of 2015. Depending on how it was calculated, this represented between 11-19% of the population of students eligible for testing in grades 3 to 11 in the state. There was also a positive correlation between higher district opt-out rates and wealthier districts. We found that several factors contributed to these trends. Predominant amongst these were an accumulated skepticism with high stakes testing in general and the new PARCC assessment in particular, concerns from the Common Core State Standards rollout, teacher union opposition to premature teacher accountability, and confusion in the messages of state policymakers about graduation requirements. These explanatory factors were based upon interviews with over 30 state policymakers, professional education association representatives, advocacy group leaders, school administrators, teachers, parents, and students

Implications of the Ammonia Distribution on Jupiter from 1 to 100 Bars as Measured by the Juno Microwave Radiometer

The latitude-altitude map of ammonia mixing ratio shows an ammonia-rich zone at 0-5degN, with mixing ratios of 320-340 ppm, extending from 40-60 bars up to the ammonia cloud base at 0.7 bars. Ammonia-poor air occupies a belt from 5-20degN. We argue that downdrafts as well as updrafts are needed in the 0-5degN zone to balance the upward ammonia flux. Outside the 0-20degN region, the belt-zone signature is weaker. At latitudes out to +/-40deg, there is an ammonia-rich layer from cloud base down to 2 bars which we argue is caused by falling precipitation. Below, there is an ammonia-poor layer with a minimum at 6 bars. Unanswered questions include how the ammonia-poor layer is maintained, why the belt-zone structure is barely evident in the ammonia distribution outside 0-20degN, and how the internal heat is transported through the ammonia-poor layer to the ammonia cloud base

Highly depleted alkali metals in Jupiter's deep atmosphere

Water and ammonia vapors are known to be the major sources of spectral absorption at pressure levels observed by the microwave radiometer (MWR) on Juno. However, the brightness temperatures and limb darkening observed by the MWR at its longest wavelength channel of 50 cm (600 MHz) in the first 9 perijove passes indicate the existence of an additional source of opacity in the deep atmosphere of Jupiter (pressures beyond 100 bar). The absorption properties of ammonia and water vapor, and their relative abundances in Jupiter's atmosphere do not provide sufficient opacity in deep atmosphere to explain the 600 MHz channel observation. Here we show that free electrons due to the ionization of alkali metals, i.e. sodium, and potassium, with sub-solar metallicity [M/H] (log based 10 relative concentration to solar) in the range of [M/H] = -2 to [M/H] = -5 can provide the missing source of opacity in the deep atmosphere. If the alkali metals are not the source of additional opacity in the MWR data, then their metallicity at 1000 bars can only be even lower. The upper bound of -2 on the metallicity of the alkali metals contrasts with the other heavy elements -- C, N, S, Ar, Kr, and Xe -- which are all enriched relative to their solar abundances having a metallicity of approximately +0.5.Comment: This manuscript has been accepted for publication in The Astrophysical Journal Letters. The final version of the paper will be available in the published journal. This arXiv version is provided for informational purpose