CFA Institute: CFA Digest: Table of Contents

Earnings Management and the Post-Earnings Announcement Drift

cfapubs@cfainstitute.org (Gregory G. Gocek) — Thu, 02 Feb 2012 18:06:09 GMT

CFA Digest, Ahead of Print.
The authors test earnings management as a likely determinant of the delayed market response to earnings news. The delay anomaly is consistent both for companies that experience large positive earnings changes and manage them downward and for those that experience large negative earnings changes and manage them upward.

The Information Content of the S&P 500 Index and VIX Options on the Dynamics of the S&P 500 Index

cfapubs@cfainstitute.org (Raymond Galkowski) — Thu, 02 Feb 2012 18:05:55 GMT

CFA Digest, Ahead of Print.
The authors seek to determine whether information about options on the Chicago Board Options Exchange Volatility Index (VIX) aids in making predictions for the returns, volatility, and density of the S&P 500 Index. They conclude that VIX options are helpful in improving predictions—especially return predictions when the VIX is at extreme levels or is volatile.

How Do Private Equity Investors Create Value? A Summary of Findings from Ernst & Young’s Extensive Research in North America over the Past Four Years

cfapubs@cfainstitute.org (Chirag B. Patel) — Thu, 02 Feb 2012 18:06:10 GMT

CFA Digest, Ahead of Print.
Analyzing a dataset of private equity exits in North America over four years, the author determines factors that contribute to value creation. More than one-half of total value creation was a result of strategic and operational improvements. The author evaluates outperformance drivers during four phases of the private equity deal life cycle and identifies practices that contribute to above-average value creation.

The Real and Financial Implications of Corporate Hedging

cfapubs@cfainstitute.org (Keith H. Black) — Thu, 26 Jan 2012 18:46:47 GMT

CFA Digest, Ahead of Print.
By using hedges to reduce their interest rate and foreign exchange exposures, corporations reduce the risks inherent in operating levered and international businesses. Effective hedges can reduce the probability of distress and the volatility of a company’s cash flow. Hedging can also increase company value because lenders reduce interest rates and ease restrictions on capital expenditures for companies with hedging programs.

The Expected Value of a Guaranteed Minimum Withdrawal Benefit (GMWB) Annuity Rider

cfapubs@cfainstitute.org (Peter Eickelberg) — Thu, 26 Jan 2012 18:46:44 GMT

CFA Digest, Ahead of Print.
The author investigates whether guaranteed minimum withdrawal benefit (GMWB) riders provide the expected benefits to justify their true cost. He builds on previous research by considering multiple annuitant types and mortality rates. He concludes that despite costs, GMWB riders provide inexpensive longevity insurance that should be considered useful by professional financial planners.

Making Yourself Indispensable

cfapubs@cfainstitute.org (Claire Emory) — Thu, 26 Jan 2012 18:46:48 GMT

CFA Digest, Ahead of Print.
The authors show that good leaders become exceptional leaders by developing identified strengths and engaging in the business equivalent of cross-training, in which leaders focus on improving complementary skills that enhance their existing strengths and substantially improve their overall leadership effectiveness.

Venture Capital Fund Performance

cfapubs@cfainstitute.org (Brindha Gunasingham) — Thu, 26 Jan 2012 18:46:47 GMT

CFA Digest, Ahead of Print.
The authors study venture capital (VC) fund performance. The funds substantially outperformed the listed equity market during the study period, but the returns were susceptible to a high degree of volatility and skewness. The authors also find that the dot-com bubble produced superior returns in the VC industry but was followed by a massive slump.

The Influence of Affect on Beliefs, Preferences, and Financial Decisions

cfapubs@cfainstitute.org (Natalie Schoon) — Thu, 26 Jan 2012 18:46:50 GMT

CFA Digest, Ahead of Print.
The area of the human brain that deals with emotions is the same area that processes information about risk, rewards, and punishment. Therefore, investors experiencing such positive emotions as excitement are likely to take greater risks, whereas investors experiencing such negative emotions as stress and fear are likely to take less risk.

Recent Trends in Sustainable and Responsible Investing in the United States

cfapubs@cfainstitute.org (Derek W. Johnson) — Thu, 26 Jan 2012 18:46:49 GMT

CFA Digest, Ahead of Print.
At the start of 2010, 12 percent of all professionally managed assets in the United States were managed in a way that reportedly involved environmental, social, and governance (ESG) issues. The authors review sustainable and responsible investing, highlight its growth over the past 15 years, identify key strategies, and explore motivations behind its use. Currently, tobacco is the second most frequently incorporated ESG factor and environmental factors are the most frequently incorporated criteria.

The Impact of Liquidity on Option Prices

cfapubs@cfainstitute.org (Thomas M. Arnold) — Fri, 20 Jan 2012 15:05:17 GMT

CFA Digest, Ahead of Print.
Using spot and option liquidities, the authors demonstrate a connection between option prices and option implied volatilities. They find that low (high) spot liquidity leads to high (low) option prices and that options become cheaper as the options market becomes more liquid. Furthermore, spot and option liquidities appear to affect implied volatility levels, but only option liquidity affects the slope within the implied volatility curve.

Returns to Private Equity—Idiosyncratic Risk Does Matter!

cfapubs@cfainstitute.org (Luis Garcia-Feijoo) — Fri, 20 Jan 2012 15:05:19 GMT

CFA Digest, Ahead of Print.
Business owners have a large share of their net worth invested in private equity. The author finds a positive association between U.S. owners’ share of net worth invested in the private equity of their companies and the returns on those investments. This finding suggests that private equity owners receive compensation for their lack of diversification and exposure to idiosyncratic risk.

Does Fair Value Reporting Affect Risk Management? International Survey Evidence

cfapubs@cfainstitute.org (Yong Shuai) — Fri, 20 Jan 2012 15:05:19 GMT

CFA Digest, Ahead of Print.
Risk management can enhance company value by reducing the cost of financial distress, allowing better planning and funding of investment projects, raising tax benefits, and easing information asymmetries between the company and shareholders. Using data from a global survey of CFOs of both public and private companies, the authors study whether derivatives reporting regulation affects companies’ risk management policies.

Corporate Social Responsibility: Should I Invest For It or Against It?

cfapubs@cfainstitute.org (Spencer L. Klein) — Thu, 12 Jan 2012 14:10:02 GMT

CFA Digest, Ahead of Print.
Previous studies of socially responsible investing (SRI) have focused on comparing its outperformance with a broad equity benchmark. The authors instead compare the performance of responsible companies with that of irresponsible ones and find that irresponsible companies outperform. They surmise that investors adopting an SRI strategy must be extremely careful and are often more interested in SRI than higher returns.

Hedge Funds in Asia: The Crocodiles Are Coming

cfapubs@cfainstitute.org (Stephen Phillip Huffman) — Thu, 12 Jan 2012 14:10:01 GMT

CFA Digest, Ahead of Print.
The author discusses why hedge funds in Asia have not been very popular and what hedge funds need to overcome before they are attractive to investors. The author postulates that a decline in Asian equity and property prices may be necessary before Asian investors are amenable to investing in hedge funds.

Understanding Client Culture

cfapubs@cfainstitute.org (Natalie Schoon) — Thu, 12 Jan 2012 14:10:00 GMT

CFA Digest, Ahead of Print.
Advisers have to avoid projecting their own values, fears, and concerns onto clients and instead need to act in-line with the requirements of the client. An operational framework covering communication, value priorities, decision-making processes, and perceptions of managing and management can help professionals handle the challenge of creating a client “personal culture” framework.

Currency Hedged Benchmark Replication: Challenges and Improvements

cfapubs@cfainstitute.org (Lee M. Dunham) — Thu, 12 Jan 2012 14:09:54 GMT

CFA Digest, Ahead of Print.
The authors document the limitations and challenges of using currency-hedged benchmarks in the assessment of the performance of international asset managers, and they make recommendations for improving these benchmarks.

The Long-Term Performance of a Social Investment Universe

cfapubs@cfainstitute.org (Vipul K. Bansal) — Thu, 12 Jan 2012 14:09:57 GMT

CFA Digest, Ahead of Print.
The authors examine the costs and benefits associated with social investing. They find that there are neither benefits nor costs associated with social constraints on a portfolio and that social responsibility is still a free good. They also find that after adjusting for fundamental factors and beta, the social policy effect is very small for the 1992–2010 period.

In Search of Attention

cfapubs@cfainstitute.org (Claire Emory) — Thu, 12 Jan 2012 14:09:58 GMT

CFA Digest, Ahead of Print.
The authors use Google Trends’ search volume index (SVI) to measure investor attention. They find that the SVI is correlated with but different from existing proxies for investor attention and that it captures investor attention in a more timely manner than other measures. They also find evidence that the SVI reflects attention more from individuals than from institutions.

Behavioral Biases of Mutual Fund Investors

cfapubs@cfainstitute.org (Gregory G. Gocek) — Thu, 12 Jan 2012 14:09:59 GMT

CFA Digest, Ahead of Print.
The authors examine how behavioral biases affect the mutual fund choices of individual investors. They analyze several behavioral factors that hamper decision making and detail the effects on investment performance across fund types, providing descriptive stereotypical categories for the identified psychological failings.

The Journal Interview: Howard Marks, CFA

cfapubs@cfainstitute.org (Hue Chye Ling) — Thu, 05 Jan 2012 14:23:34 GMT

CFA Digest, Ahead of Print.
Howard Marks, a successful fixed-income fund manager, is interviewed about his recently published book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor. Marks has developed a flexible application of the concept of risk that he overlays onto his investing process.

Equity Index Construction

cfapubs@cfainstitute.org (Ghazal Zahid Khan et al) — Thu, 05 Jan 2012 14:23:36 GMT

CFA Digest, Ahead of Print.
The author outlines the history of equity index construction to the present day, noting that the two largest providers supply 180,000 indices. He identifies the key differences between portfolio construction and index construction and highlights the importance of indices to the investment management industry.

Reserve Currencies: Climbing Greenback Mountain

cfapubs@cfainstitute.org (Billyana Kuncheva) — Thu, 05 Jan 2012 14:23:30 GMT

CFA Digest, Ahead of Print.
The author discusses the benefits and costs to a nation of its currency serving as a reserve currency. The author also discusses the gradual progress that China’s yuan is making toward becoming one of the world’s major reserve currencies.

Quantitative Easing Works: Lessons from the Unique Experience in Japan 2001–2006

cfapubs@cfainstitute.org (Johann U. de Villiers) — Thu, 05 Jan 2012 14:23:33 GMT

CFA Digest, Ahead of Print.
A quantitative easing monetary policy was implemented by the Bank of Japan in March 2001. The authors develop a new method of analysis using a Markov-switching, factor-augmented vector autoregressive model. They find that the policy led to increased economic activity and price levels in Japan, which is a different result from those obtained in previous empirical studies.

Do Hedge Funds Manage Their Reported Returns?

cfapubs@cfainstitute.org (Natalie Schoon) — Thu, 29 Dec 2011 14:16:04 GMT

CFA Digest, Ahead of Print.
The authors find evidence that hedge funds engage in returns management by either underreporting returns during the year and adding them back in December or by borrowing from next January’s returns. The authors find that the degree of returns management is positively related to the amount of opportunity a fund has to manipulate returns.

Detecting the Presence of Insider Trading via Structural Break Tests

cfapubs@cfainstitute.org (Georgeann Portokalis) — Thu, 29 Dec 2011 14:16:05 GMT

CFA Digest, Ahead of Print.
The authors develop a method to detect the possible presence of insider trading prior to an unexpected price-sensitive announcement. The new test is more straightforward and less dependent on data than existing bootstrap techniques. They find that their method can identify possible insider trading over an entire sample period as well as determine the timing and statistical significance of such trades.

Information in (and Not in) the Term Structure

cfapubs@cfainstitute.org (Richard D. Long) — Thu, 29 Dec 2011 14:16:06 GMT

CFA Digest, Ahead of Print.
Finance theory assumes that yield premiums can be determined by using existing interest rates as factors, but the author questions this assumption’s empirical support. He believes that only half of the bond risk premium can be predicted using yields. The remaining yield premium component appears to be negatively correlated with economic activity but is only partially explained by macroeconomic variables.

Momentum in Japan: The Exception That Proves the Rule

cfapubs@cfainstitute.org (Paras Gupta) — Thu, 29 Dec 2011 14:16:07 GMT

CFA Digest, Ahead of Print.
The author studies the “failure” of the momentum strategy in Japan. He finds that the failure, which occurred only in Japan, does not prove that momentum strategies are ineffective. Rather, momentum strategies combined with the value effect are powerful across the globe, including in Japan.

Hedge Fund Leverage

cfapubs@cfainstitute.org (Michael Kobal) — Thu, 29 Dec 2011 14:16:06 GMT

CFA Digest, Ahead of Print.
The authors find that changes in aggregate hedge fund leverage ran countercyclical to the leverage of listed investment banks and broker/dealers during the 2007–09 financial crisis. They find that changes in hedge fund leverage are related to broad funding-cost variables, asset values, and return volatilities; fund flows or changes in assets under management did not contribute to changes in leverage.

Three Keys to the City: Resources, Agglomeration Economies, and Sorting

cfapubs@cfainstitute.org (Servaas Houben) — Thu, 29 Dec 2011 14:16:06 GMT

CFA Digest, Ahead of Print.
Metropolitan areas are associated with higher costs of living and, therefore, higher wage demands from employees. The author outlines three economic explanations for why companies choose to remain in large metropolitan areas and discusses the policy implications of each.

The FTSE StableRisk Indices

cfapubs@cfainstitute.org (Victoria J. Rati) — Thu, 22 Dec 2011 13:52:40 GMT

CFA Digest, Ahead of Print.
The StableRisk Indices, created by FTSE, are long-only indices in which risk is dynamically controlled by using rules that daily rebalance portfolio weights to a targeted volatility level. The philosophy is that the long-term risk–return trade-off is not constant but is interrupted by periods when holding high-risk assets is not rewarded. Thus, investors might want to maintain a stable risk exposure, as provided by these indices.

Crash Risk of the Euro in the Sovereign Debt Crisis of 2009–2010

cfapubs@cfainstitute.org (Sadaf Aliuddin) — Thu, 22 Dec 2011 13:52:40 GMT

CFA Digest, Ahead of Print.
The authors show that the creditworthiness of euro-region countries affects the volatility of those countries’ currencies. This dynamic is true for countries with weak positions as well as for those with relatively stronger fiscal positions.

Banks’ Net Interest Margin in the 2000s: A Macro-Accounting International Perspective

cfapubs@cfainstitute.org (Keith H. Black) — Thu, 22 Dec 2011 13:52:41 GMT

CFA Digest, Ahead of Print.
A higher net interest margin (NIM), the spread between a bank’s borrowing and lending activities, is associated with inefficiency in the financial system. The NIM is affected by the levels of inflation, interest rate volatility, and unemployment. Central banks can improve the intermediary function of the banking system by adopting monetary policies that dampen these three macroeconomic variables.

Implementing a Macroprudential Framework: Blending Boldness and Realism

cfapubs@cfainstitute.org (Tokunboh Ishmael) — Thu, 22 Dec 2011 13:52:38 GMT

CFA Digest, Ahead of Print.
Following the recent global crisis, the concept of a macroprudential orientation in strengthening regulatory and supervisory frameworks has gathered rapid momentum and attention. The author seeks to provide guidance for the design and implementation of a macroprudential framework that ensures a balance between bold design and realistic implementation.

The Downside Risk of Postponing Social Security Benefits

cfapubs@cfainstitute.org (Chenchuramaiah T. Bathala) — Thu, 15 Dec 2011 15:15:22 GMT

CFA Digest, Ahead of Print.
The decision of when to start drawing Social Security benefits is difficult but important for most individuals. Modeling initiation versus postponement as a sequential process, the authors show that risk-averse single people should begin taking benefits at the earliest eligible age. They also find that females do not gain by postponing benefits and that single males suffer greater losses by postponing than single females.

Resolving the Presidential Puzzle

cfapubs@cfainstitute.org (Ahmed Sule) — Thu, 15 Dec 2011 15:15:25 GMT

CFA Digest, Ahead of Print.
The authors examine the link between stock returns and the presidential cycle in the United States. They investigate whether there is a risk-based explanation for higher returns during Democratic presidencies compared with Republican presidencies. The findings show that the market exhibits higher returns when Democrats control the presidency, with smaller companies experiencing the most significant improvement.

Tracking Error Rebalancing

cfapubs@cfainstitute.org (Katerina Ostrovsky) — Thu, 15 Dec 2011 15:15:25 GMT

CFA Digest, Ahead of Print.
The authors evaluate traditional and alternative approaches to portfolio rebalancing during normal and stressed market conditions. They recommend appropriate rebalancing policies in the context of market volatility and liquidity. Portfolio managers may find that during periods of market stress, the more efficient rebalancing strategy differs markedly from traditional rebalancing strategies.

Institutional Investors and the Limits of Arbitrage

cfapubs@cfainstitute.org (Rajiv Kalra) — Thu, 15 Dec 2011 15:15:26 GMT

CFA Digest, Ahead of Print.
The author finds that institutional investors fail to achieve superior returns and seem to lack stock-picking skills. Institutions appear to hold the market portfolio because their returns are highly correlated with the value-weighted index. Evidence also suggests that institutions do not emphasize the book-to-market ratio, momentum, or accruals, which are attributes known to predict stock returns.

Rollover Risk and Market Freezes

cfapubs@cfainstitute.org (Sadaf Aliuddin) — Thu, 08 Dec 2011 14:00:11 GMT

CFA Digest, Ahead of Print.
The authors develop a model of funding risk for financial institutions and special purpose vehicles that operate with a severe maturity mismatch between assets and liabilities. The funding risk arises from market freezes that reduce access to short-term debt on the basis of collateral. The authors also include a number of risks in the model.

Credit Default Swaps and the Empty Creditor Problem

cfapubs@cfainstitute.org (Brian A. Maris) — Thu, 08 Dec 2011 14:00:04 GMT

CFA Digest, Ahead of Print.
When debtholders insure against default but retain control rights, an empty creditor problem follows. The authors examine outcomes of this condition with and without insurance through credit default swaps (CDS). They show that the cash-flow commitment benefits of CDS strengthen creditors’ bargaining power, reducing the incidence of strategic default by borrowers; yet creditors overinsure in equilibrium, increasing the incidence of bankruptcy.

Portfolios for Investors Who Want to Reach Their Goals While Staying on the Mean–Variance Efficient Frontier

cfapubs@cfainstitute.org (Gregory Seals) — Thu, 08 Dec 2011 14:00:09 GMT

CFA Digest, Ahead of Print.
The authors provide evidence that investors think about their portfolios in terms of different goals with varying time frames, levels of risk tolerance, and expected returns. They propose a mental accounting portfolio theory to take advantage of how investors already think. It is a goals-based approach that combines features of mean–variance and behavioral portfolio theories.

Should Investors Include Commodities in Their Portfolios After All? New Evidence

cfapubs@cfainstitute.org (Mohammed Saqib) — Thu, 08 Dec 2011 14:00:14 GMT

CFA Digest, Ahead of Print.
Adding commodities to portfolios is believed to provide superior risk-adjusted returns compared with having only traditional asset classes. The authors determine that risk-adjusted returns of portfolios holding either commodity indices or commodity futures are inferior to those of traditional stock/bond portfolios. A few exceptions exist, such as the commodities boom during 2005–2008.

Hedging Equity Market Risk in Hedge Fund Investing: A New Approach

cfapubs@cfainstitute.org (Keith Joseph MacIsaac) — Thu, 08 Dec 2011 14:00:15 GMT

CFA Digest, Ahead of Print.
The prevailing wisdom in the investment industry before the financial crisis was that hedge fund performance was largely immune to market declines. Although the authors believe that hedge funds retain attractive diversification qualities, their exposure to equity market risk leaves them vulnerable to declines. They test three equity overlay strategies that reduce the downside risk and improve performance for multistrategy and style-specific funds of hedge funds.

Risk Shifting and Mutual Fund Performance

cfapubs@cfainstitute.org (Lee M. Dunham) — Thu, 08 Dec 2011 14:00:12 GMT

CFA Digest, Ahead of Print.
The authors examine the level of risk shifting by mutual funds over time. Their results suggest that mutual funds do engage in substantial risk-shifting behavior and that this behavior has implications for subsequent return performance. Funds that tend to increase risk tend to underperform funds that hold risk relatively unchanged.

Liquidity and Arbitrage in the Market for Credit Risk

cfapubs@cfainstitute.org (Johann U. de Villiers) — Thu, 08 Dec 2011 14:00:13 GMT

CFA Digest, Ahead of Print.
The authors investigate the relationships among default risk, liquidity, bond characteristics, and issuing company characteristics in the pricing of U.S. corporate bonds. They explore the use of a recently developed measure of liquidity called “latent liquidity.” This measure does not require trading data and can thus be used as a liquidity proxy for infrequently traded assets.

The Case for Emerging Market Corporates

cfapubs@cfainstitute.org (Marla Howard) — Thu, 01 Dec 2011 21:59:42 GMT

CFA Digest, Ahead of Print.
Positive macroeconomic and demographic factors, improved local regulation, increased investment inflows from outside investors, and the development of the Corporate Emerging Markets Bond Index have stimulated growth in the emerging market (EM) corporate debt asset class. A relatively low default rate for EM corporate debt contributes to the potential for excess risk-adjusted returns despite additional risks.

A Cautionary Note about Robert Shiller’s CAPE

cfapubs@cfainstitute.org (Thomas M. Arnold) — Thu, 01 Dec 2011 21:59:45 GMT

CFA Digest, Ahead of Print.
The author evaluates why the cyclically adjusted price-to-earnings ratio (CAPE) may be biased, including changes in the composition of the U.S. Consumer Price Index, tax treatment, and earnings recognition over time. Because the CAPE is compared with a long-run mean (data starting in 1871), the changes may make comparisons with the historical CAPE (or measures based on the historical CAPE) inaccurate.

Are All Currency Managers Equal?

cfapubs@cfainstitute.org (Mark A. Harrison et al) — Tue, 20 Dec 2011 18:14:09 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 1-2.
The authors extend their previous research to determine whether alternative investments are a good choice for diversification by using a factor model to evaluate the performance of a selection of currency managers. The authors conclude that the currency management strategy of alpha hunting offers advantages over beta grazing.

Commodity Price Gains: Speculation vs. Fundamentals

cfapubs@cfainstitute.org (Jonathan Wheeler Hubbard) — Tue, 20 Dec 2011 18:13:46 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 3-4.
Commodities are a main input to finished goods. They represent a significant variable cost for many businesses, and their price levels can often increase rapidly and unexpectedly. The authors compare the fundamental underpinnings of commodity price gains with the speculative forces of commodity price gains. They further explore the potential for policy responses and the associated challenges.

Hedge Funds: Pricing Controls and the Smoothing of Self-Reported Returns

cfapubs@cfainstitute.org (Keith Joseph MacIsaac) — Tue, 20 Dec 2011 18:13:26 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 5-7.
The self-reported returns for a typical hedge fund display a pattern of positive serial correlation that is especially evident when compared with the returns of other asset classes and portfolios. The authors seek to explain this pattern by examining the relationship between hedge funds’ pricing controls and the statistical properties evident in their monthly returns.

Predicting Financial Distress and the Performance of Distressed Stocks

cfapubs@cfainstitute.org (Ahmed Sule) — Tue, 20 Dec 2011 18:13:23 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 7-9.
The authors examine financially distressed companies’ common stock performance and discover low share prices, high levels of volatility, high leverage, low cash holdings, and low returns, irrespective of size and value characteristics. They build and test a model that measures the probability of a company becoming distressed and then show that “safe” stocks clearly outperform “distressed” stocks, even before adjusting for differences in risk.

Public or Private? A Review of the Eclipse of the Public Company in the Current Environment

cfapubs@cfainstitute.org (Peter Eickelberg) — Tue, 20 Dec 2011 18:13:25 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 9-11.
Considering Facebook’s choice to remain a privately held corporation, the author examines reasons why a company that could easily launch an IPO would choose instead to avoid public company status. He concludes that, properly handled, a “long runway” before going public serves the company, its investors, and the overall economy.

Barron’s Red Flags: Do They Actually Work?

cfapubs@cfainstitute.org (Rajiv Kalra) — Tue, 20 Dec 2011 18:13:58 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 12-14.
A 2009 Barron’s article identifies several phrases companies use in their U.S. SEC filings that should raise red flags for investors. The authors examine the performance of companies that use the phrases and find that some phrases are associated with lower stock returns. Other phrases are linked to greater dispersion in analyst earnings forecasts, subsequent volatility, and the likelihood of being sued for fraud.

Do Individual Investors Have Asymmetric Information Based on Work Experience?

cfapubs@cfainstitute.org (Victoria J. Rati) — Tue, 20 Dec 2011 18:13:22 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 15-15.
The authors study whether investors overweight stocks in their industry of employment and, if so, whether they earn positive abnormal returns. They find that the investments actually produce negative abnormal returns and that, in many cases, the results are statistically significant. They conclude that overconfidence is the most likely reason for overweighting what they call “expertise stocks.”

Individual Investors and Volatility

cfapubs@cfainstitute.org (Claire Emory) — Tue, 20 Dec 2011 18:13:33 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 17-19.
Taking advantage of a change in the French stock market, the authors test whether retail trading has a positive effect on the volatility of stock returns. They find that when the costs of retail trading increased, stock volatility declined. The size of price reversals and the price impact of a trade also declined significantly.

Is a Team Different from the Sum of Its Parts? Evidence from Mutual Fund Managers

cfapubs@cfainstitute.org (Thomas M. Arnold) — Tue, 20 Dec 2011 18:13:20 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 19-20.
Using 10 years of mutual fund performance data, the authors test two theories of decision making: group shift theory and diversification of opinions theory. They find that group-managed mutual funds diverge in performance from single-manager funds because they tend to be influenced by the diversification of opinions theory rather than the group shift theory.

Friends or Foes? Target Selection Decisions of Sovereign Wealth Funds and Their Consequences

cfapubs@cfainstitute.org (Johann U. de Villiers) — Tue, 20 Dec 2011 18:13:56 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 21-23.
The authors investigate the investment strategies of sovereign wealth funds (SWFs). They find that the investment decisions of SWFs are similar to those of large passive institutional investors. SWFs prefer to invest in developed economies and in large, poorly performing companies. A positive announcement effect occurs upon investment, but it does not influence the target company’s returns over the long term.

The Internal Governance of Firms

cfapubs@cfainstitute.org (Lee M. Dunham) — Tue, 20 Dec 2011 18:13:43 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 23-25.
The authors develop a model of internal governance in which self-serving actions taken by top management are limited by the threat of adverse reactions from subordinate junior managers. They conclude that internal governance by junior managers serves to mitigate the principal–agent problem and improve company efficiency, even with weak external governance by shareholders.

Insider Trading and Option Grant Timing in Response to Fire Sales (and Purchases) of Stocks by Mutual Funds

cfapubs@cfainstitute.org (Michael Kobal) — Tue, 20 Dec 2011 18:13:39 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 26-28.
When extreme capital flows force mutual funds to enter or exit positions in equities independent of fundamental developments, insiders provide liquidity from their own funds and prompt more option grants to themselves. The authors show that these opportunistic moves by insiders help accelerate a correction in prices following extreme capital flows.

Activism

cfapubs@cfainstitute.org (Yong Shuai) — Tue, 20 Dec 2011 18:13:34 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 29-30.
Recovery from the global financial crisis has been slower than expected. The author hypothesizes that government activism has increased financial uncertainty for businesses, which have responded by avoiding illiquid investments.

American Idiocracy: The Civil War in Washington, DC, Is Damaging American Business

cfapubs@cfainstitute.org (Yong Shuai) — Tue, 20 Dec 2011 18:14:04 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 30-31.
Fighting between the U.S. political parties is having a detrimental effect on U.S. businesses. As the ideological debate continues, it creates continued uncertainty and an environment that makes it difficult for businesses to flourish.

The End of Chimerica

cfapubs@cfainstitute.org (Natalie Schoon) — Tue, 20 Dec 2011 18:13:51 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 32-33.
Export-led development in China combined with overconsumption in the United States has dominated the global economy for much of 2000–2010. The authors call this relationship “Chimerica.” Events during the recent crisis, however, made it clear that the relationship cannot continue because of currency revaluations that are necessary to rebalance the global economy.

The Global Rise of the Value-Weighted Portfolio

cfapubs@cfainstitute.org (Stephen Phillip Huffman) — Tue, 20 Dec 2011 18:14:02 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 34-35.
The authors develop and test a metric that is a proxy for the use of value-weighted portfolios in a market. Their results indicate that value weighting is more popular in developed markets than in emerging markets and is gaining popularity in general. The authors conclude that increases in disclosure, the size of institutional holdings, and fewer trading restrictions explain the increase in popularity.

Good, Bad and Ugly

cfapubs@cfainstitute.org (Joanne W.M. Li) — Tue, 20 Dec 2011 18:14:11 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 36-37.
Data about municipal bond ratings of various U.S. states provide information for investors that inevitably impacts relative valuations. Federal spending on states, Medicaid expenses, changes in tax receipts, tax-backed debt, state pensions, and unemployment rates are some of the structural changes currently influencing bond ratings.

Islam’s Philosophical Divide: Dreaming of a Caliphate

cfapubs@cfainstitute.org (Natalie Schoon) — Tue, 20 Dec 2011 18:13:48 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 37-38.
The author addresses the seemingly conflicting notions of democracy and Islam within the Muslim world. The desire of some Muslims for a global caliphate, a religious and political authority to govern the Islamic world, seems to be a dividing issue, but some believe that this problem can be solved.

Liquidity Risk Management and Credit Supply in the Financial Crisis

cfapubs@cfainstitute.org (Jot K. Yau) — Tue, 20 Dec 2011 18:14:11 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 39-41.
Despite the Fed’s efforts to inject liquidity into the banking system during the 2007–09 financial crisis, U.S. commercial banks reduced credit generation to manage their liquidity risk exposure. The authors find that banks with more loans and securitized assets on their balance sheets decreased lending, whereas banks that relied on core deposits and equity capital financing continued to lend.

The Long Slump

cfapubs@cfainstitute.org (Gregory G. Gocek) — Tue, 20 Dec 2011 18:13:54 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 41-44.
Modeling the ongoing elusiveness of vigorous economic recovery from the “Great Slump” of 2007–2009, the author blames the failure to achieve the desired full employment equilibrium on the lack of interest rate adjustments. He concludes with policy suggestions for completing the turnaround.

Algorithmic Trading Usage Patterns and Their Costs

cfapubs@cfainstitute.org (Chenchuramaiah T. Bathala) — Tue, 20 Dec 2011 18:14:07 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 45-47.
Algorithmic trading has grown dramatically and now accounts for about 30 percent of institutional trading. The authors examine the use of algorithmic trading on the basis of volatility regime, demand for liquidity, and buy-side firms’ strategies. They also assess the relative performance of strategies from the standpoint of transaction costs among different strategies and within individual strategy types.

Bubble Trouble

cfapubs@cfainstitute.org (Spencer L. Klein) — Tue, 20 Dec 2011 18:13:57 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 48-49.
The author discusses the valuations of social media companies (such as Facebook, Groupon, and Twitter) and how they compare with the companies’ current earnings. He finds that most of the companies seem to be extremely overvalued.

Explaining International Equity Valuation Ratios: The Roles of Commodity Price Inflation and Relative Asset Volatilities

cfapubs@cfainstitute.org (Nicholas J. Handley) — Tue, 20 Dec 2011 18:13:44 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 49-51.
The authors test whether long-bond yields and relative stock and bond market volatilities are as effective in explaining earnings and dividend yields in international markets as they are in the United States. They find that the degree to which companies can pass on input price increases is important and conjecture that low commodity prices may have fueled the stock market’s technology bubble.

The New Financial Matchmakers

cfapubs@cfainstitute.org (Vipul K. Bansal) — Tue, 20 Dec 2011 18:13:36 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 52-53.
The author examines the benefits and potential of private market networks (PMNs). The main purpose of PMNs is to allocate capital more efficiently and effectively than public stock markets. He discusses the various ways these emerging technologies benefit the economy.

Short Arbitrage, Return Asymmetry, and the Accrual Anomaly

cfapubs@cfainstitute.org (Derek W. Johnson) — Tue, 20 Dec 2011 18:14:05 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 54-55.
Previous research has found a negative correlation between high accruals and future stock returns: the accrual anomaly. The authors test whether investors short sell high accrual stocks to take advantage of this market inefficiency. They find a strong relationship between high accruals and short interest as well as asymmetrical returns in high accrual stocks with lower institutional ownership.

Volatile Earnings Growth, the Price of Earnings and the Value Premium

cfapubs@cfainstitute.org (Chirag B. Patel) — Tue, 20 Dec 2011 18:14:08 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 56-57.
The relationship among an asset’s price, present earnings, and the anticipated growth of the earnings is well established. The relationship between the price and the higher-order growth terms of earnings, however, is not well understood. The authors model and evaluate whether asset prices measured by the price-to-earnings ratio are affected by the volatility of earnings growth.

Accountancy: Ledger Domain

cfapubs@cfainstitute.org (Brian A. Maris) — Tue, 20 Dec 2011 18:13:31 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 58-59.
Following the financial crisis of 2007–2008, accountants and banking regulators realized the inadequacy of requiring financial institutions to recognize losses on loans and investments only after default has occurred. Efforts to revise the International Financial Reporting Standards and Generally Accepted Accounting Principles to allow losses to be recognized sooner, however, have not yet been successful.

Commentary: Financial Reporting and Financial Crises: The Case for Measuring Financial Instruments at Fair Value in the Financial Statements

cfapubs@cfainstitute.org (Natalie Schoon) — Tue, 20 Dec 2011 18:13:28 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 59-61.
The author offers his views on why he supports the Financial Accounting Standards Board’s proposal that financial instruments be measured at fair value. He cites the failure of current reporting guidelines, lessons from other crises, and the fact that fair value measures reflect the effects of interest rate changes.

Financial Analysts Need Sharper Accounting Tools

cfapubs@cfainstitute.org (Michael Kobal) — Tue, 20 Dec 2011 18:13:59 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 61-63.
GAAP accounting distorts economic reality and contributes to the development of economic crises in our modern economy. The author believes a wealth accounting model would discourage earnings management and manipulation, make financial statements more useful for decision making, and enable regulators to better fulfill their role in the economy.

The Forgotten History of Domestic Debt

cfapubs@cfainstitute.org (Tokunboh Ishmael) — Tue, 20 Dec 2011 18:13:52 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 64-66.
The authors study the history of defaults on domestic public debt and the impact on inflation and external debt defaults. The results help them draw some bold conclusions as to why countries default on external debts at seemingly low debt thresholds. The authors also explore the neglect of domestic debt in the literature and assert that repayments do not necessarily favor external over domestic creditors.

How Did Increased Competition Affect Credit Ratings?

cfapubs@cfainstitute.org (Gregory Seals) — Tue, 20 Dec 2011 18:14:01 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 66-68.
The authors examine whether the emergence of Fitch Ratings as a major player in the credit rating industry for corporate debt positively affected the quality and usefulness of credit ratings. They find that increased competition in the credit rating industry weakened the quality of credit ratings.

The Illiquidity of Corporate Bonds

cfapubs@cfainstitute.org (Spencer L. Klein) — Tue, 20 Dec 2011 18:13:29 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 68-70.
The authors develop a framework for measuring the illiquidity of corporate bond trading in U.S. fixed-income markets. Their analysis considers not only illiquidity of individual corporate bonds but also aggregate data for the entire corporate bond space across many common features. They also investigate illiquidity in the context of understanding the variations of corporate bond spreads over time.

Modeling Ultimate Loss Given Default on Corporate Debt

cfapubs@cfainstitute.org (Luis Garcia-Feijoo) — Tue, 20 Dec 2011 18:13:55 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 70-71.
The authors investigate the determinants of loss given default (LGD), the magnitude of likely losses to a lender on an exposure, by using a simultaneous equation approach to jointly model LGD at the obligor and instrument levels. The determinants they examine include contractual features, company-level financial and capital structure variables, industry-level variables, and debt and equity market variables.

The Globe: The Paradox of Samsung’s Rise

cfapubs@cfainstitute.org (Jot K. Yau) — Tue, 20 Dec 2011 18:13:30 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 72-74.
The New Management initiative at Samsung has helped it become a global corporate giant. The authors discuss the strategy and growing pains Samsung experienced during the implementation process, which may help investors understand the evolution of multinational corporations. The company is now further reinventing itself, giving up what made it successful to reach a new level in the world market.

The Good or the Bad? Which Mutual Fund Managers Join Hedge Funds?

cfapubs@cfainstitute.org (Victoria J. Rati) — Tue, 20 Dec 2011 18:13:37 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 75-76.
The authors study whether the mutual fund industry loses its best managers to the hedge fund industry. They find that mutual funds retain strong-performing managers despite competition for them from hedge funds. Poor-performing mutual fund managers are more likely than others to leave mutual funds, particularly when hedge funds are rapidly expanding.

Managing Yourself: A Smarter Way to Network

cfapubs@cfainstitute.org (Nicholas J. Handley) — Tue, 20 Dec 2011 18:13:41 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 77-78.
The authors present an academic self-help guide on how to build a more effective network. The guide highlights common networking errors and describes how a core but diversified group of genuine contacts is most productive. They offer a four-point plan for people to declutter their networks and rebuild more focused networks.

An Alternative Measure of the “World Market Portfolio”: Determinants, Efficiency, and Information Content

cfapubs@cfainstitute.org (Katerina Ostrovsky) — Tue, 20 Dec 2011 18:13:40 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 79-81.
The market portfolio is usually defined as an aggregate of individual assets. The authors develop a new approach to building a market portfolio by looking at the total value of the economy. They test the new measure’s explanatory power and efficiency and conclude that the new portfolio performs reasonably well in describing the market.

The Evolution of Equity Mandates in Institutional Portfolios

cfapubs@cfainstitute.org (Paras Gupta) — Tue, 20 Dec 2011 18:13:50 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 82-84.
The author explores how equity mandates have evolved in institutional portfolios. Beginning with “classic” 60/40 balanced mandates, institutional equity mandates have evolved alongside advances in financial research and changes in diversification potential from international investing. Lately, risk parity strategies have led to a further evolution of equity mandates.

Recent Trends in Trading Activity and Market Quality

cfapubs@cfainstitute.org (Claire Emory) — Tue, 20 Dec 2011 18:13:42 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 85-87.
The authors investigate the dramatic increase in NYSE trading activity between 1993 and 2008. They find that the increase in turnover resulted from more frequent, smaller trades and that institutional investors, not retail investors, have been driving the increased volume. Increased trading has been accompanied by increased market efficiency and reduced intraday volatility, which suggests that efforts to tax equity trading may have adverse consequences.

Labor Income Dynamics at Business-Cycle Frequencies: Implications for Portfolio Choice

cfapubs@cfainstitute.org (Mohammed Saqib) — Tue, 20 Dec 2011 18:13:27 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 88-89.
The authors examine the portfolio choices of young agents with low wealth-to-income ratios. To derive a clear representation of these agents’ holdings, the authors link the distributions of labor income and stock returns to business cycles. After the authors account for countercyclical volatility and procyclical mean labor income growth, they find (contrary to prior research) that these agents hold fewer stocks than their peers.

Making Financial Markets Work for Consumers

cfapubs@cfainstitute.org (John R. Minahan) — Tue, 20 Dec 2011 18:13:32 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 90-91.
The authors offer advice to the head of the new Consumer Financial Protection Bureau. They review the principles that provide justification for regulation and offer guidance on how to approach regulation and how to manage the new bureau. They advocate for a principles-based, data-driven approach to regulation.

Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle

cfapubs@cfainstitute.org (Natalie Schoon) — Tue, 20 Dec 2011 18:14:06 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 91-92.
The author proposes that rather than focusing on withdrawal rates, retirement planning should focus on savings rates. He uses a historical simulation approach to illustrate the principle of a safe savings rate.

A Safer Safe Withdrawal Rate Using Various Return Distributions

cfapubs@cfainstitute.org (Gregory G. Gocek) — Tue, 20 Dec 2011 18:13:45 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 93-95.
The authors subject the “4 percent rule,” a common method of retirement savings liquidation, to validity testing using simulation methodology covering numerous possible scenarios. Their findings show that the rule may result in a higher failure rate than previously believed and that the safe percentage is likely to be much lower.

Downsides and DCF: Valuing Biased Cash Flow Forecasts

cfapubs@cfainstitute.org (Richard S. Ruback et al) — Tue, 20 Dec 2011 18:14:03 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 96-98.
Cash flow forecasts used in discounted cash flow (DCF) valuations are often excessively optimistic and need to be adjusted for downside events. The author suggests that the appropriate adjustment to the DCF formula, incorporating both practitioner and academic approaches, depends on the nature of the omitted downside events.

Regulatory Pressure and Fire Sales in the Corporate Bond Market

cfapubs@cfainstitute.org (Georgeann Portokalis) — Tue, 20 Dec 2011 18:13:47 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 99-100.
The authors find that when insurance companies need to manage their capital reserves to meet regulatory requirements, fire sales of downgraded investment-grade corporate bonds often result. In addition, the downward pressure on bond prices intensifies if potential buyers from outside the insurance industry are not able or willing to buy the downgraded issue because of their own distress.

November Issue

Tue, 20 Dec 2011 18:14:10 GMT

CFA Digest Nov 2011, Vol. 41, No. 4: 1-100.
This PDF contains the complete November 2011 printed issue of the CFA Digest.