The Center for Research in Security Prices

Working Paper No. 500

September 1999

University of Chicago
Graduate School of Business

An Analysis of Risk and Pricing Anomalies

Tobias J. Moskowitz
Graduate School of Business, University of Chicago

This paper can be downloaded without charge from the

Social Science Research Network Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=214169

An index to the Working Papers in the Center for Research in Security Prices Working Paper Series is
located at: http://gsbwww.uchicago.edu/fac/finance/papers/

6HSWHPEHU  

$Q $QDO\VLV RI 5LVN DQG 3ULFLQJ $QRPDOLHV

7RELDV - 0RVNRZLW]e

*UDGXDWH 6FKRRO RI %XVLQHVV 8QLYHUVLW\ RI &KLFDJR , WKDQN 7\ &DOODKDQ -RKQ &RFKUDQH *RUGRQ
'HOLDQHGLV 0DUN *ULQEODWW 2ZHQ /DPRQW 2OLYLHU /HGRLW &KULVWRSKHU 3RON 5LFKDUG 5ROO 3HGUR 6DQWD
&ODUD DQG 'LGLHU 6RUQHWWH IRU YDOXDEOH FRPPHQWV DQG LQVLJKWV , DOVR WKDQN VHPLQDU SDUWLFLSDQWV DW 8&/$
<DOH +DUYDUG 8QLYHUVLW\ RI 5RFKHVWHU 2KLR 6WDWH 8QLYHUVLW\ RI 3HQQV\OYDQLD :KDUWRQ &ROXPELD 'XNH
8QLYHUVLW\ RI &RORUDGR DW %RXOGHU 8QLYHUVLW\ RI 7H[DV DW $XVWLQ 8QLYHUVLW\ RI &KLFDJR 1RUWKZHVWHUQ DQG
0LFKLJDQ IRU FRPPHQWV RQ DQ HDUO\ GUDIW RI WKLV SDSHU ZKLFK VWHPV IURP WKH VHFRQG FKDSWHU RI P\ GLVVHUWD
WLRQ , DOVR WKDQN WKH &HQWHU IRU 5HVHDUFK LQ 6HFXULW\ 3ULFHV DQG WKH 'LPHQVLRQDO )XQG $GYLVRUV 5HVHDUFK
)XQG IRU nQDQFLDO VXSSRUW $OO HUURUV DUH WKH VROH UHVSRQVLELOLW\ RI WKH DXWKRU

&RUUHVSRQGHQFH WR 7RELDV - 0RVNRZLW] 8QLYHUVLW\ RI &KLFDJR *UDGXDWH 6FKRRO RI %XVLQHVV 
(DVW WK 6WUHHW &KLFDJR ,/  SKRQH   HPDLO WRELDVPRVNRZLW]#JVEXFKLFDJRHGX

$Q $QDO\VLV RI 5LVN DQG 3ULFLQJ $QRPDOLHV

$EVWUDFW
7KLV SDSHU H[DPLQHV WKH OLQN EHWZHHQ VHYHUDO ZHOONQRZQ DVVHW SULFLQJ DQRPDOLHV DQG
FRYDULDQFH ULVN (VWLPDWLQJ WKH WLPHVHULHV RI WKH FRYDULDQFH PDWUL[ RI DVVHW UHWXUQV YLD
D PXOWLYDULDWH *$5&+ PRGHO , TXDQWLI\ WKH FRQWULEXWLRQ PDGH E\ HDFK DQRPDO\ WR WKH
FRYDULDQFH PDWUL[ RI DVVHW UHWXUQV DV ZHOO DV LWV DELOLW\ WR IRUHFDVW IXWXUH FRYDULDQFHV ,
nQG WKDW DQRPDORXV UHWXUQV DVVRFLDWHG ZLWK nUP VL]H DUH FORVHO\ OLQNHG WR WKH FRYDULDQFH
PDWUL[ ZKLOH WKRVH DVVRFLDWHG ZLWK ERRNWRPDUNHW HTXLW\ DUH ZHDNO\ OLQNHG +RZHYHU
UHWXUQV DVVRFLDWHG ZLWK PRPHQWXP GR QRW DSSHDU UHODWHG WR FRYDULDQFH ULVN DQG GR QRW
IRUHFDVW IXWXUH FRYDULDQFHV )LQDOO\ GHVSLWH LWV ODFN RI SUHGLFWLYH SRZHU RQ WKH FURVVVHFWLRQ
RI H[SHFWHG UHWXUQV WKH PDUNHW SRUWIROLR LV WKH VLQJOH PRVW LPSRUWDQW IDFWRU FRQWULEXWLQJ
WR DQG IRUHFDVWLQJ FRYDULDQFH ULVN

(mRUWV WR H[SODLQ WKH FURVVVHFWLRQ RI H[SHFWHG VWRFN UHWXUQV YLD PXOWLIDFWRU OLQHDU DVVHW
SULFLQJ PRGHOV KDYH JHQHUDOO\ IDLOHG GXH WR WKH H[LVWHQFH RI D KRVW RI HPSLULFDO DQRPDOLHV
&RQVLGHU WKH &DSLWDO $VVHW 3ULFLQJ 0RGHO &$30 RI 6KDUSH  /LQWQHU  DQG
%ODFN  8QGHU WKH &$30 PDUNHW n
V RU WKH FRYDULDWLRQ RI D VHFXULW\
V UHWXUQ ZLWK
WKH UHWXUQ RQ WKH PDUNHW VKRXOG EH VXpFLHQW WR GHVFULEH WKH FURVVVHFWLRQ RI H[SHFWHG
UHWXUQV +RZHYHU PDQ\ HPSLULFDO DQRPDOLHV DUH IRXQG WR FRQWUDGLFW WKLV LPSOLFDWLRQ 0RVW
QRWDEO\ %DQ]  nQGV WKDW VL]H PDUNHW FDSLWDOL]DWLRQ KDV DGGLWLRQDO H[SODQDWRU\
SRZHU RYHU PDUNHW n IRU GHVFULELQJ WKH FURVVVHFWLRQ RI H[SHFWHG VWRFN UHWXUQV ,Q DGGLWLRQ
RWKHU YDULDEOHV KDYH EHHQ VKRZQ WR H[SODLQ FURVVVHFWLRQDO GLmHUHQFHV LQ DYHUDJH UHWXUQV LQ
WKH SUHVHQFH RI ERWK PDUNHW n DQG VL]H
7KH H[LVWHQFH RI WKHVH DQRPDOLHV PD\ EH GXH WR VHYHUDO VRXUFHV ZKLFK ZH FDQ EURDGO\
JURXS LQWR WKUHH GLVWLQFW FDWHJRULHV 7KH nUVW SRVVLELOLW\ LV WKDW WKHVH DQRPDOLHV DULVH EHFDXVH
WKH DVVHW SULFLQJ PRGHO LV QRW FDSWXULQJ D FRPSRQHQW RI V\VWHPDWLF ULVN ZKLFK WKHVH nUP
FKDUDFWHULVWLFV PD\ EH FRUUHODWHG ZLWK 7KH VHFRQG VHW RI H[SODQDWLRQV DUH EHKDYLRUDO
VXJJHVWLQJ WKDW WKHVH DQRPDOLHV DULVH EHFDXVH LQYHVWRUV FDUH DERXW FHUWDLQ nUP DWWULEXWHV
SHUKDSV PRUH VR WKDQ SRUWIROLR YRODWLOLW\ RU WKDW LQYHVWRUV DFW LUUDWLRQDOO\ WR LQIRUPDWLRQ RU
KDYH SV\FKRORJLFDO ELDVHV LQ WKHLU LQWHUSUHWDWLRQ RI LQIRUPDWLRQ DOO RI ZKLFK PD\ LQGXFH DQ
DSSDUHQW UHODWLRQ EHWZHHQ DYHUDJH UHWXUQV DQG WKHVH nUP FKDUDFWHULVWLFV )LQDOO\ WKH WKLUG
VHW RI H[SODQDWLRQV DULVH IURP oDZHG PHWKRGRORJ\ VXFK DV ELDVHV LQ FRPSXWLQJ UHWXUQV IURP
nUP VXUYLYRUVKLS RU PLFURVWUXFWXUH HmHFWV DV ZHOO DV RWKHU VWDWLVWLFDO HUURUV ,Q DGGLWLRQ
WKH QXPHURXV DQG H[WHQVLYH VWXGLHV WKDW KDYH EHHQ FRQGXFWHG RQ WKH 86 HTXLW\ PDUNHW
VXJJHVWV WKDW GDWD PLQLQJ PD\ EH D SODXVLEOH FRQFHUQ
:KLOH LVVXHV RI oDZHG PHWKRGRORJ\ DUH LPSRUWDQW UHFHQW OLWHUDWXUH SULPDULO\ IRFXVHV RQ
GLVFHUQLQJ EHWZHHQ ULVNEDVHG DQG EHKDYLRUDO H[SODQDWLRQV IRU WKHVH DQRPDOLHV ,Q DGGLWLRQ
PRVW RI WKHVH VWXGLHV WDNH JUHDW FDUH LQ DYRLGLQJ WKHVH HPSLULFDO SLWIDOOV DQG UHFHQW UHVHDUFK
KDV VKRZQ WKDW PDQ\ RI WKHVH DQRPDOLHV DUH SUHVHQW LQ LQWHUQDWLRQDO HTXLW\ PDUNHWV ZLWK
 %KDQGDUL  nQGV WKDW OHYHUDJH 6WDWWPDQ  DQG 5RVHQEHUJ 5HLG DQG /DQVWHLQ  nQG

WKDW WKH UDWLR RI ERRN YDOXH RI HTXLW\ WR PDUNHW YDOXH RI HTXLW\ DQG %DVX  nQGV WKDW HDUQLQJVSULFH
UDWLRV DOO KDYH DGGLWLRQDO H[SODQDWRU\ SRZHU RYHU n DQG VL]H 0RUH UHFHQWO\ -HJDGHHVK DQG 7LWPDQ 
GRFXPHQW WKH PRPHQWXP DQRPDO\ WKH IDFW WKDW VWRFNV WKDW KDYH SHUIRUPHG ZHOO LQ WKH SDVW  PRQWKV
ZLQQHUV FRQWLQXH WR SHUIRUP ZHOO RYHU WKH QH[W  PRQWKV DQG VWRFNV WKDW KDYH SHUIRUPHG SRRUO\
ORVHUV FRQWLQXH WR SHUIRUP SRRUO\ ZKLFK DSSHDUV XQH[SODLQHG E\ DQG VHHPLQJO\ XQUHODWHG WR DQ\ RI WKHVH
RWKHU DQRPDOLHV )RU D GHWDLOHG GLVFXVVLRQ RI WKLV OLWHUDWXUH VHH )DPD DQG )UHQFK 
 )RU H[DPSOHV RI VWXGLHV GHDOLQJ ZLWK WKHVH LVVXHV VHH /R DQG 0DF.LQOD\  .DXO DQG 1LPDOHQGUDQ
 &RQUDG DQG .DXO  DQG -HJDGHHVK DQG 7LWPDQ 

ORZ FRUUHODWLRQ WR 86 GDWD DQG LQ VXEVHTXHQW WLPH SHULRGV SURYLGLQJ RXW RI VDPSOH
HYLGHQFH GLPLQLVKLQJ GDWD PLQLQJ FRQFHUQV
7KLV SDSHU DWWHPSWV WR HYDOXDWH WKH SODXVLELOLW\ RI ULVNEDVHG H[SODQDWLRQV IRU WKH H[LV
WHQFH RI WKHVH DQRPDOLHV , DWWHPSW WR DQVZHU WZR LPSRUWDQW \HW UHODWHG TXHVWLRQV 7KH
nUVW LV WR ZKDW H[WHQW GR WKHVH DQRPDOLHV FRQWULEXWH WR WKH FRYDULDQFH PDWUL[ RI DVVHW UH
WXUQV" )RU LQVWDQFH ZH NQRZ IDFWRUPLPLFNLQJ SRUWIROLRV IRUPHG IURP WKHVH DQRPDOLHV KDYH
VLJQLnFDQW SRZHU IRU H[SODLQLQJ DYHUDJH UHWXUQV EXW GR WKH\ DOVR GHVFULEH ULVN HJ WKH VHF
RQG PRPHQW RI UHWXUQV" 7KH VHFRQG TXHVWLRQ LV VLPLODU EXW LV DVNHG IURP D SUDFWLFDO
SHUVSHFWLYH +RZ ULVN\ DUH LQYHVWPHQW VWUDWHJLHV GHVLJQHG WR H[SORLW WKHVH DQRPDOLHV"
7R DQVZHU WKHVH TXHVWLRQV , GRFXPHQW WKH OLQN EHWZHHQ SULFLQJ DQRPDOLHV DQG WKH FR
YDULDQFH PDWUL[ RI DVVHW UHWXUQV , HPSOR\ D XQLTXH PXOWLYDULDWH *$5&+ PRGHO WR HVWLPDWH
WKH WLPHYDU\LQJ FRYDULDQFH PDWUL[ RI DVVHW UHWXUQV 7KLV PHWKRGRORJ\ DOORZV PH WR DQ
DO\]H WKH DQRPDOLHV LQ DQ HQYLURQPHQW RI FKDQJLQJ UHWXUQ YRODWLOWLHV DQG FRUUHODWLRQV ,Q
DGGLWLRQ WKH WLPHVHULHV RI FRQGLWLRQDO FRYDULDQFH PDWULFHV DOORZV IRU RXW RI VDPSOH WHVWV WR
EH FRQGXFWHG RQ WKH DELOLW\ RI WKH DQRPDOLHV WR IRUHFDVW IXWXUH FRYDULDQFHV
7KH WKUHH VWURQJHVW DQG PRVW FLWHG DQRPDOLHV DUH WKRVH RI VL]H ERRNWRPDUNHW DQG
PRPHQWXP 3UHYLRXV OLWHUDWXUH GRFXPHQWV VXEVWDQWLDO H[SODQDWRU\ SRZHU RI WKHVH DQRPD
OLHV IRU WKH FURVVVHFWLRQ RI H[SHFWHG UHWXUQV ZKLFK LV D QHFHVVDU\ EXW LQVXpFLHQW WHVW RI
ZKHWKHU WKHVH DQRPDOLHV DUH GXH WR ULVN )RU LQVWDQFH XQGHU WKH $37 IUDPHZRUN RI 5RVV
 WKH DQRPDOLHV PXVW DOVR FRQWULEXWH VXEVWDQWLDOO\ WR WKH FRYDULDQFH PDWUL[ RI DVVHW
UHWXUQV LQ WKH HFRQRP\ ,Q DQDO\]LQJ VL]H ERRNWRPDUNHW DQG PRPHQWXP , nQG WKDW VL]H
KDV VLJQLnFDQW H[SODQDWRU\ SRZHU IRU UHWXUQ VHFRQG PRPHQWV +RZHYHU WKH FRQWULEXWLRQ
WR WKH FRYDULDQFH PDWUL[ RI UHWXUQV PDGH E\ ERRNWRPDUNHW LV UDWKHU ZHDN DQG WKH FRQ
WULEXWLRQ IURP PRPHQWXP LV QHJOLJLEOH 7KLV VXJJHVWV WKDW PRPHQWXP LV QRW WLHG WR WKH
FRYDULDQFH PDWUL[ DQG LV WKHUHIRUH D SRRU SUR[\ IRU DQ $37 ULVN IDFWRU UHODWLYH WR VL]H
DQG ERRNWRPDUNHW )ROORZLQJ WKH VDPH DQDO\VLV KRZHYHU , nQG WKDW WKH PDUNHW SRUWIROLR
LV WKH VLQJOH PRVW LPSRUWDQW IDFWRU FRQWULEXWLQJ WR WKH FRYDULDQFH PDWUL[ RI DVVHW UHWXUQV
)XUWKHUPRUH LQ RXW RI VDPSOH WHVWV ERWK WKH PDUNHW SRUWIROLR DQG D VL]H IDFWRU GHVFULEH
UHWXUQ VHFRQG PRPHQWV EHWWHU WKDQ IDFWRUV GHULYHG VWDWLVWLFDOO\ IURP SULQFLSDO FRPSRQHQWV
DQDO\VLV 7KXV GHVSLWH LWV ZHOOGRFXPHQWHG ODFN RI SUHGLFWLYH SRZHU IRU WKH FURVVVHFWLRQ
 6HH )DPD DQG )UHQFK  IRU HYLGHQFH RI WKH ERRNWRPDUNHW HmHFW LQ LQWHUQDWLRQDO PDUNHWV 5RXZHQ

KRUVW  IRU HYLGHQFH RI PRPHQWXP LQ  (XURSHDQ FRXQWULHV *ULQEODWW DQG .HORKDUMX  IRU
HYLGHQFH RI PRPHQWXP LQ )LQODQG /LHZ DQG 9DVVDORX  IRU HYLGHQFH RI VL]H ERRNWRPDUNHW DQG PR
PHQWXP LQ  LQWHUQDWLRQDO HFRQRPLHV DQG +DZDZLQL DQG .HLP  DQG UHIHUHQFHV WKHUHLQ IRU HYLGHQFH
RI D KRVW RI DQRPDOLHV LQ LQWHUQDWLRQDO PDUNHWV
 6HH 'DYLV )DPD DQG )UHQFK  IRU HYLGHQFH RI YDOXH DQG JURZWK HmHFWV LQ WKH  WLPH
SHULRG DQG -HJDGHHVK DQG 7LWPDQ  IRU HYLGHQFH RI PRPHQWXP LQ WKH  WLPH SHULRG

RI H[SHFWHG UHWXUQV D PDUNHW IDFWRU DSSHDUV WR GHVFULEH FRYDULDQFH ULVN H[WUHPHO\ ZHOO
VXSSRUWLQJ LWV LQFOXVLRQ DV DQ LPSRUWDQW FRPSRQHQW RI D PXOWLIDFWRU SULFLQJ PRGHO
)LQDOO\ LW VKRXOG EH QRWHG WKDW XQGHU D PRUH JHQHUDO HTXLOLEULXP DVVHW SULFLQJ IUDPH
ZRUN VXFK DV D FRQVXPSWLRQEDVHG RU PDFURHFRQRPLF IXQGDPHQWDOEDVHG PRGHO DV LQ 0HU
WRQ  WKHUH GRHV QRW QHHG WR EH D OLQN EHWZHHQ WKH DQRPDOLHV DQG WKH FRYDULDQFH
PDWUL[ 1HYHUWKHOHVV DQDO\]LQJ WKH VHFRQG PRPHQWV RI UHWXUQV DQG WKHLU UHODWLRQ WR WKH
DQRPDOLHV \LHOGV LQWHUHVWLQJ LQVLJKWV LQWR WKHLU VRXUFH )URP ERWK DQ DFDGHPLF DQG SUDFWLFDO
SHUVSHFWLYH H[SORULQJ WKHVH LVVXHV LV LQWHUHVWLQJ DQG DW WKH YHU\ OHDVW KHOSV LGHQWLI\ ZKHWKHU
WKHVH DQRPDOLHV UHDVRQDEO\ UHSUHVHQW IDFWRUPLPLFNLQJ SRUWIROLRV LQ DQ $37 VHWWLQJ )XU
WKHUPRUH WKLV VWXG\ FRPSOHPHQWV WKDW RI /LHZ DQG 9DVVDORX  ZKR H[DPLQH WKH OLQN
EHWZHHQ VL]H ERRNWRPDUNHW DQG PRPHQWXP DQG IXWXUH HFRQRPLF JURZWK DWWHPSWLQJ WR
OLQN WKHVH DQRPDOLHV ZLWK SODXVLEOH ULVN IDFWRUV XQGHU DQ HTXLOLEULXP SULFLQJ PRGHO VXFK DV
0HUWRQ  /LHZ DQG 9DVVDORX  nQG WKDW ERWK VL]H DQG ERRNWRPDUNHW IRUHFDVW
IXWXUH HFRQRPLF JURZWK EXW WKDW PRPHQWXP LV XQUHODWHG WR HFRQRPLF DFWLYLW\ 7DNLQJ
RXU UHVXOWV WRJHWKHU VL]H DQG ERRNWRPDUNHW DSSHDU PRUH VWURQJO\ OLQNHG WR HFRQRPLF ULVN
XQGHU HLWKHU DQ $37 RU HTXLOLEULXP DVVHW SULFLQJ IUDPHZRUN WKDQ PRPHQWXP
7KH UHVW RI WKH SDSHU LV RUJDQL]HG DV IROORZV 6HFWLRQ , GLVFXVVHV WKH SUHYLRXV OLWHUDWXUH
RQ ULVN DQG QRQULVN EDVHG H[SODQDWLRQV IRU VWRFN UHWXUQ DQRPDOLHV 6HFWLRQ ,, GHVFULEHV
WKH WUDGLQJ VWUDWHJLHV GHVLJQHG WR H[SORLW WKH DQRPDOLHV RU WKDW DUH HPSOR\HG DV IDFWRU
PLPLFNLQJ SRUWIROLRV DQG GHVFULEHV WKH PRGHO RI WLPHYDU\LQJ ULVN 6HFWLRQ ,,, GRFXPHQWV
KRZ PXFK HDFK RI WKH DQRPDOLHV FRQWULEXWH WR WKH FRYDULDQFH PDWUL[ RI DVVHW UHWXUQV DV ZHOO
DV WKHLU DELOLW\ WR IRUHFDVW IXWXUH FRYDULDQFHV 6HFWLRQ ,9 WKHQ GHYHORSV RSWLPDO WUDGLQJ
VWUDWHJLHV WR H[SORLW WKH DQRPDOLHV DQG UHH[DPLQHV ZKHWKHU FKDUDFWHULVWLFV RU FRYDULDQFHV
EHWWHU GHVFULEH WKH GLVWULEXWLRQ RI UHWXUQV )LQDOO\ 6HFWLRQ 9 FRQFOXGHV WKH SDSHU

,

3UHYLRXV /LWHUDWXUH

2YHU WKH ODVW WKUHH GHFDGHV nQDQFLDO HFRQRPLVWV KDYH DWWHPSWHG WR SDUVLPRQLRXVO\ GHVFULEH
WKH FURVVVHFWLRQ RI H[SHFWHG VWRFN UHWXUQV 0RWLYDWHG E\ WKH &DSLWDO $VVHW 3ULFLQJ 0RGHO
EHWD RU WKH FRYDULDQFH ZLWK WKH PDUNHW UHWXUQ ZDV VXSSRVHG WR IXOO\ FDSWXUH WKH FURVV
VHFWLRQ RI UHWXUQV +RZHYHU HDUO\ WHVWV RI WKLV SUHGLFLWRQ IDLOHG GXH WR WKH LPSRUWDQFH RI
SULFHWRHDUQLQJV UDWLR %DVX  GLYLGHQG \LHOG /LW]HQEHUJHU DQG 5DPDVZDP\ 
DQG PRVW LPSRUWDQWO\ nUP VL]H %DQ]  ZKLFK VXEVXPHG WKHVH RWKHU HmHFWV IRU
GHWHUPLQLQJ DYHUDJH VWRFN UHWXUQV ,Q WKH PLGGOH WR ODWH V RWKHU nUP FKDUDFWHULVWLFV
ZHUH VKRZQ WR KDYH UHWXUQ SUHGLFWDELOLW\ LQ WKH SUHVHQFH RI ERWK EHWD DQG VL]H $ KRVW
RI nUP FKDUDFWHULVWLFV HPSOR\LQJ UDWLRV RI ERRN YDOXH WR PDUNHW YDOXH ZHUH SRUWUD\HG DV


PHDVXUHV RI YDOXH YHUVXV JURZWK 7KH PRVW QRWDEOH LV ERRNWRPDUNHW HTXLW\ %(0(
IRXQG E\ 5RVHQEHUJ 5HLG DQG /DQVWHLQ  )LQDOO\ WKH FURVVVHFWLRQ RI UHWXUQV ZDV
FRPSOLFDWHG E\ WKH H[SODQDWRU\ SRZHU RI SDVW UHWXUQ YDULDEOHV 'H%RQGW DQG 7KDOHU 
IRXQG WKDW H[SHFWHG UHWXUQV ZHUH ORZ IRU nUPV ZLWK KLJK UHWXUQV RYHU WKH SDVW VHYHUDO \HDUV
DQG YLFH YHUVD &RQYHUVHO\ -HJDGHHVK DQG 7LWPDQ  IRXQG H[SHFWHG UHWXUQV ZHUH KLJK
IRU nUPV ZLWK KLJK UHWXUQV RYHU WKH SDVW  PRQWKV DQG YLFH YHUVD ZKLFK WKH\ WHUPHG
WKH ?PRPHQWXP HmHFW

$

5LVN%DVHG ([SODQDWLRQV

7KH H[LVWHQFH RI SXEOLFO\ DYDLODEOH nUP FKDUDFWHULVWLFV WKDW FRXOG GHVFULEH DYHUDJH UHWXUQV
OHG WR WKH LQFOXVLRQ RI DGGLWLRQDO IDFWRUV LQWR DVVHW SULFLQJ PRGHOV ,QVSLUHG E\ WKH WKHRUHWLFDO
ZRUN RI 5RVV  DQG 0HUWRQ  UHVHDUFKHUV EHJDQ DGGLQJ IDFWRUV EH\RQG WKH PDUNHW
WR GHVFULEH WKH FURVVVHFWLRQ RI H[SHFWHG UHWXUQV +XEHUPDQ DQG .DQGHO  UHFRJQL]LQJ
WKDW nUPV RI VLPLODU VL]H WHQGHG WR PRYH WRJHWKHU SURSRVHG VL]H IDFWRUV DV D PHWKRG RI
H[SODLQLQJ WKH FURVVVHFWLRQ RI H[SHFWHG UHWXUQV $ VHULHV RI SDSHUV E\ )DPD DQG )UHQFK
   VXJJHVWHG WKDW PDQ\ RI WKH H[SHFWHG UHWXUQ DQRPDOLHV LQ nQDQFH FRXOG
EH FDSWXUHG E\ VHQVLWLYLW\ WR MXVW WKUHH IDFWRUV WKH PDUNHW D VL]H IDFWRU JHQHUDWHG E\ D ORQJ
SRVLWLRQ LQ D VPDOO FDSLWDOL]DWLRQ SRUWIROLR DQG VKRUW SRVLWLRQ LQ D ODUJH PDUNHW FDSLWDOL]DWLRQ
SRUWIROLR DQG D ERRNWRPDUNHW IDFWRU JHQHUDWHG E\ D ORQJ SRVLWLRQ LQ D SRUWIROLR RI YDOXH
KLJK %(0( VWRFNV DQG D VKRUW SRVLWLRQ LQ D SRUWIROLR RI JURZWK ORZ %(0( VWRFNV
)DPD DQG )UHQFK  nQG WKDW WKHLU WKUHH IDFWRU PRGHO VXEVXPHV D KRVW RI FURVVVHFWLRQDO
DQRPDOLHV H[FHSW IRU PRPHQWXP ZKLFK UHPDLQV WKH JUHDWHVW FKDOOHQJH WR WKHLU PRGHO
7R FDSWXUH WKH PRPHQWXP DQRPDO\ RQH FRXOG DOVR IRUP D PRPHQWXP ?IDFWRUPLPLFNLQJ
SRUWIROLR DV &DUKDUW  GRHV DQG FODLP WKDW D IRXU IDFWRU PRGHO QRZ JRYHUQV WKH UHWXUQ
JHQHUDWLQJ SURFHVV IRU VWRFNV +RZHYHU DGGLQJ QHZ H[SODQDWRU\ YDULDEOHV WR RXU PRGHOV IRU
HDFK QHZ DQRPDO\ LV VRPHZKDW XQDSSHDOLQJ )XUWKHUPRUH WR GDWH WKHUH LV QR HVWDEOLVKHG
OLQN EHWZHHQ WKHVH DQRPDOLHV DQG WKH FRYDULDQFH PDWUL[ RI DVVHW UHWXUQV &HUWDLQO\ )DPD
DQG )UHQFK DQG RWKHUV KDYH GHPRQVWUDWHG WKDW DVVHW UHWXUQV ZKLFK FRYDU\ SRVLWLYHO\ ZLWK
WKHVH ?IDFWRUPLPLFNLQJ SRUWIROLRV DOVR KDYH WKH GHVLUHG FKDUDFWHULVWLFV IURP ZKLFK WKHVH
?IDFWRUV DUH GHULYHG DQG DUH DVVRFLDWHG ZLWK KLJKHU DYHUDJH UHWXUQV HJ D nUP ZLWK D
KLJK VHQVLWLYLW\ WR WKH )DPD)UHQFK ERRNWRPDUNHW IDFWRU +0 / ZLOO DOVR KDYH D KLJK
ERRNWRPDUNHW UDWLR DQG ZLOO KDYH KLJKHU DYHUDJH UHWXUQV WKDQ D nUP ZLWK ORZ VHQVWLYLW\
WR +0/ 3HUKDSV WKRXJK LW LV QRW VXUSULVLQJ WKDW IDFWRUPLPLFNLQJ SRUWIROLRV GHVLJQHG
IURP nUP DWWULEXWHV DUH VWDWLVWLFDOO\ FRUUHODWHG ZLWK WKRVH DWWULEXWHV DQG LQGHHG ZLWK DYHU

DJH UHWXUQV EXW WR FDOO VXFK D UHODWLRQ HYLGHQFH RI ULVN PD\ EH SUHPDWXUH ,Q DGGLWLRQ DV
'DQLHO DQG 7LWPDQ  VKRZ nUP FKDUDFWHULVWLFV KDYH PXFK VWURQJHU H[SODQDWRU\ SRZHU
WKDQ FRYDULDWLRQ ZLWK WKHVH CFKDUDFWHUVLWLFJHQHUDWHG IDFWRUV
IRU GHVFULELQJ WKH FURVVVHFWLRQ
RI H[SHFWHG UHWXUQV 7KH\ GHPRQVWUDWH WKDW FRQWUROOLQJ IRU GLVSHUVLRQ LQ WKH FKDUDFWHULVWLF
WKHUH LV OLWWOH LI DQ\ UHODWLRQ EHWZHHQ IDFWRU ORDGLQJV DQG DYHUDJH UHWXUQV 6XFK HYLGHQFH
DSSHDUV WR FRQWUDGLFW ULVNEDVHG LQWHUSUHWDWLRQV RI WKHVH DQRPDOLHV
7KH SDSHU DOVR H[DPLQHV ZKHWKHU nUP FKDUDFWHULVWLFV EHWWHU GHVFULEH WKH UHWXUQ JHQHU
DWLQJ SURFHVV RI HTXLWLHV WKDQ GR FRYDULDWLRQ ZLWK IDFWRUV GHULYHG IURP WKHVH FKDUDFWHULVWLFV
, nQG WKDW ERWK VL]H FKDUDFWHULVLWLFV DQG IDFWRU ORDGLQJV KDYH SUHGLFWLYH SRZHU FRQWUDGLFWLQJ
'DQLHO DQG 7LWPDQ  EXW WKHUH LV OLWWOH HYLGHQFH RI SUHGLFWLYH SRZHU IURP FRYDULDWLRQ
ZLWK D ERRNWRPDUNHW RU PRPHQWXP IDFWRU

%

%HKDYLRUDO ([SODQDWLRQV

0RUH UHFHQWO\ H[SODQDWLRQV RI SULFLQJ DQRPDOLHV KDYH EHHQ RmHUHG ZKLFK DUH EDVHG RQ LQ
YHVWRU EHKDYLRU WKDW LV QRW IXOO\ UDWLRQDO ,I WKHVH DQRPDOLHV DUH GXH WR LQYHVWRU VHQWLPHQW
RU VRPH IRUP RI LQYHVWRU LUUDWLRQDOLW\ WKHQ SURnWDEOH WUDGLQJ VWUDWHJLHV FDQ EH GHVLJQHG WR
H[SORLW WKHP )RU LQVWDQFH -HJDGHHVK DQG 7LWPDQ  RmHU D EHKDYLRUDO H[SODQDWLRQ IRU
PRPHQWXP FODLPLQJ WKDW SRVLWLYH VWRFN UHWXUQ DXWRFRUUHODWLRQ LV GULYHQ E\ ?GHOD\HG SULFH
UHDFWLRQV WR nUPVSHFLnF LQIRUPDWLRQ S  +RZHYHU LI LQYHVWRUV SHUVLVWHQWO\ DQG LUUD
WLRQDOO\ XQGHUUHDFW WR nUPVSHFLnF LQIRUPDWLRQ WKHQ UDWLRQDO LQYHVWRUV FDQ SURnW IURP WKHLU
LUUDWLRQDO FRXQWHUSDUWV ,Q DQ HFRQRP\ ZLWK D ODUJH QXPEHU RI DVVHWV D VHOInQDQFLQJ SRUWIR
OLR ORQJ KLJK SDVW UHWXUQ VWRFNV DQG VKRUW ORZ SDVW UHWXUQ VWRFNV ZHLJKWHG WR KDYH D VLPLODU
IDFWRU EHWD FRQnJXUDWLRQ DV WKH ZLQQHU SRUWIROLR FRXOG EH FUHDWHG ZLWK QHJOLJLEOH YDULD
WLRQ DQG SRVLWLYH H[SHFWHG UHWXUQ ,QGHHG PRPHQWXP LQYHVWPHQW VWUDWHJLHV IRU LQVWDQFH
JHQHUDWH 6KDUSH UDWLRV  WR  WLPHV ODUJHU WKDQ WKH PDUNHW 6KDUSH UDWLR ZKLFK DFFRUGLQJ
WR 0HKUD DQG 3UHVFRWW  LV DOUHDG\ WRR KLJK ,Q DGGLWLRQ /DNRQLVKRN 6KOHLIHU DQG
9LVKQ\  GRFXPHQW WKDW YDOXH KLJK %(0( YHUVXV JURZWK ORZ %(0( VWUDWHJLHV
SURGXFH KLJKHU UHWXUQV GXULQJ UHFHVVLRQV DQG EHDU PDUNHWV PDNLQJ WKHLU ODUJH ULVN SUHPLD
HYHQ PRUH SX]]OLQJ ZKHQ RQH FRQVLGHUV WKH SUHGLFWLRQV RI FRQVXPSWLRQEDVHG DVVHW SULFLQJ
PRGHOV %HFDXVH VXFK nQGLQJV DSSHDU LQFRQVLVWHQW ZLWK ULVNEDVHG H[SODQDWLRQV IRU WKHVH
DQRPDOLHV PRGHOV HPHUJHG WKDW SODFHG FRQVWUDLQWV RQ LQYHVWRU UDWLRQDOLW\ $PRQJ WKHP
 ,QGHHG )HUVRQ 6DUNLVVLDQ DQG 6LPLQ  WHOO D VWRU\ RI DQ DOSKDEHW DQRPDO\ ZKHUH WKH\ LQMHFW

DQ DUWLnFLDO DQRPDO\ XQUHODWHG WR ULVN LQWR DQ HFRQRP\ ZKLFK SURGXFHV KLJKHU DYHUDJH UHWXUQV IRU nUPV
ZKRVH QDPHV DSSHDU QHDU WKH EHJLQQLQJ RI WKH DOSKDEHW 7KH VWRU\ FRQFOXGHV ZLWK WKH HPSLULFDO UHDUFKHU
IRUPLQJ DQ DOSKDEHW ?IDFWRU HJ D ]HURFRVW SRUWIROLR RI C$
PLQXV C=
VWRFNV ZKLFK VHHPV WR FDSWXUH WKLV
DQRPDO\ FDXVLQJ WKH UHVHDUFKHU WR WULXPSKDQWO\ FRQFOXGH WKDW WKH DQRPDO\ LV GXH WR ULVN HYHQ WKRXJK QR
VXFK UHODWLRQ DFWXDOO\ H[LVWV

DUH 'DQLHO +LUVKOHLIHU DQG 6XEUDKPDQ\DP  %DUEHULV 6KOHLIHU DQG 9LVKQ\ 
DQG +RQJ DQG 6WHLQ 
,Q DGGLWLRQ , GHVLJQ WUDGLQJ VWUDWHJLHV WR RSWLPDOO\ H[SORLW WKHVH DQRPDOLHV E\ KHGJ
LQJ RXW FRPPRQ VRXUFHV RI YDULDWLRQ SUR[LHG E\ SULQFLSDO FRPSRQHQWV IDFWRUV DQG RU
WKRJRQDOL]LQJ WKH VWUDWHJLHV WR WKH RWKHU DQRPDOLHV 7KH UHVXOWLQJ CRSWLPDO
VWUDWHJLHV IRU
ERRNWRPDUNHW DQG PRPHQWXP JHQHUDWH 6KDUSH UDWLRV  WR  WLPHV ODUJHU WKDQ WKH PDUNHW
6KDUSH UDWLR ZKLOH WKH VWUDWHJ\ IRU VL]H SURGXFHV D 6KDUSH UDWLR EHORZ WKDW RI WKH PDU
NHW 7KHVH UHVXOWV VXJJHVW WKDW WKH VL]H DQRPDO\ PD\ EH WLHG WR FRYDULDQFH ULVN ZKLOH ERWK
ERRNWRPDUNHW DQG PRPHQWXP DSSHDU OHVV UHODWHG WR ULVN

,,

3URnWDEOH 7UDGLQJ 6WUDWHJLHV DQG 7LPH9DU\LQJ 5LVN

,I DQRPRORXV DYHUDJH UHWXUQV UHODWHG WR nUP FKDUDFWHULVWLFV DUH QRW GULYHQ E\ ULVN RU GDWD
HUURUV WKHQ UDWLRQDO LQYHVWRUV VKRXOG SURnW IURP WKHLU H[LVWHQFH , IRFXV RQ WKH WKUHH PRVW
QRWDEOH DQG RIWHQFLWHG DQRPDOLHV UHODWHG WR nUP VL]H ERRNWRPDUNHW DQG PRPHQWXP
PHDVXUHG E\ SDVW RQH \HDU UHWXUQV 7R WDNH DGYDQWDJH RI WKH VL]H HmHFW , JR ORQJ WKH 
VPDOOHVW VWRFNV EDVHG RQ PDUNHW FDSLWDOL]DWLRQ LQ WKH SUHYLRXV \HDU DQG VKRUW WKH ELJJHVW
 RI nUPV ZKHUH nUPV DUH YDOXHZHLJKWHG ZLWKLQ WKH ORQJ DQG VKRUW SRVLWLRQV 7KLV VPDOO
PLQXV ELJ 60% SRUWIROLR LV WKH VDPH SRUWIROLR FRQVWUXFWHG E\ )DPD DQG )UHQFK 
DQG XVHG DV D IDFWRUPLPLFNLQJ SRUWIROLR LQ WKHLU PRGHO /LNHZLVH , IRUP D KLJK PLQXV ORZ
+0/ ERRNWRPDUNHW SRUWIROLR LGHQWLFDO WR )DPD DQG )UHQFK
V  SRUWIROLR ZKLFK
LV ORQJ WKH  KLJKHVW ERRNWRPDUNHW nUPV DQG VKRUW WKH ORZHVW  EDVHG RQ ERRN
WRPDUNHW HTXLW\ LQ WKH SUHYLRXV FDOHQGDU \HDU , DOVR IRUP D ZLQQHUV KLJK SDVW RQH \HDU
UHWXUQ PLQXV ORVHUV ORZ SDVW \HDU UHWXUQ PRPHQWXP SRUWIROLR 3 5< 5 DQG DQ LQGXVWU\
PRPHQWXP SRUWIROLR ,0
7DEOH , UHSRUWV WKH UDZ DQG VDPSOH PHDQ UHWXUQV WR WKHVH VWUDWHJLHV RYHU WKH $XJXVW 
WR -XO\  WLPH SHULRG DORQJ ZLWK WVWDWLVWLFV WHVWLQJ ZKHWKHU WKH ]HURFRVW UHWXUQVSURnWV
DUH VWDWLVWLFDOO\ GLmHUHQW IURP ]HUR $V WKH WDEOH VKRZV DOO IRXU VWUDWHJLHV SURGXFH SRVLWLYH
SURnWV DQG 3 5< 5 LV WKH PRVW SURnWDEOH RI WKH IRXU VWUDWHJLHV E\ ERWK LWV UDZ DYHUDJH
 3 5< 5 LV FRQVWUXFWHG VOLJKWO\ GLmHUHQWO\ WKDQ &DUKDUW  , IRUP YDOXHZHLJKWHG SRUWIROLRV RI WKH
KLJKHVW DQG ORZHVW  SHUFHQW RI nUPV ZLWK SULRU PRQWK UHWXUQV ODJJHG RQH PRQWK LH IURP W b  WR
W b  DQG VXEWUDFW WKH ZRUVW SDVW SHUIRUPHUV IURP WKH WRS SDVW \HDU SHUIRUPHUV &DUKDUW  IRUPV
HTXDOZHLJKWHG SRUWIROLRV DQG XVHV  DQG  EUHDNSRLQWV WR IRUP KLV IDFWRU SRUWIROLR 7KH UHVXOWLQJ
]HURFRVW SRUWIROLR LV UHIRUPHG PRQWKO\ ,0 LV FRQVWUXFWHG DV LQ 0RVNRZLW] DQG *ULQEODWW  ,W LV
ORQJ WKH WKUHH KLJKHVW SDVW PRQWK UHWXUQ LQGXVWULHV DQG VKRUW WKH WKUHH ORZHVW ZKHUH LQGXVWULHV DUH
YDOXHZHLJKWHG VXPV RI VWRFNV ZLWK VLPLODU WZR GLJLW 6,& FRGHV , HPSOR\ WZR PRPHQWXP SRUWIROLRV VLQFH
0RVNRZLW] DQG *ULQEODWW  GRFXPHQW ERWK LQGXVWU\ DQG LQGLYLGXDO VWRFN PRPHQWXP DW WKH PRQWK
KRUL]RQ QHLWKHU RI ZKLFK VXEVXPHV WKH RWKHU

PRQWKO\ UHWXUQ DV ZHOO DV LWV 6KDUSH UDWLR LQGLFDWHG E\ LWV WVWDWLVWLF

$

7LPH9DU\LQJ 5LVN

3UHYLRXV VWXGLHV KDYH VXJJHVWHG WKDW WKH KLJK DYHUDJH UHWXUQV IURP VXFK VWUDWHJLHV DUH GXH
WR WKHLU H[SRVXUH WR DQ XQLGHQWLnHG V\VWHPDWLF ULVN FRPSRQHQW +HQFH WKHVH VWUDWHJLHV PD\
SURYLGH UHDVRQDEOH ?IDFWRU PLPLFNLQJ SRUWIROLRV WR DLG LQ SULFLQJ RWKHU DVVHWV 7KLV SDSHU
H[DPLQHV WKH OLQN EHWZHHQ WKHVH VWUDWHJLHV DQG WKH FRYDULDQFH PDWUL[ RI UHWXUQV , DOORZ IRU
WKH YDULDQFHV DQG FRYDULDQFHV RI DVVHW UHWXUQV WR EH WLPHYDU\LQJ DVVHVVLQJ WKH LPSDFW RI
HDFK DQRPDO\ RQ WKH FRYDULDQFH PDWUL[ DW D SRLQW LQ WLPH 0RUHRYHU EXLOGLQJ D WLPHVHULHV
RI PDWULFHV DOORZV IRU RXWRIVDPSOH WHVWV WR EH FRQGXFWHG RQ WKH DELOLW\ RI YDULRXV IDFWRUV
IRU IRUHFDVWLQJ FRYDULDQFH ULVN 7R P\ NQRZOHGJH WKLV LV WKH nUVW VWXG\ WR XQGHUWDNH VXFK
DQ H[HUFLVH
)LJXUH  SORWV WKH WLPHVHULHV RI PRQWKO\ VWDQGDUG GHYLDWLRQ HVWLPDWHV RI nYH ]HURFRVW
SRUWIROLRV WKH H[FHVV UHWXUQ RQ WKH PDUNHW 0 NW b UI  60 % +0 / 3 5< 5 DQG ,0 
RYHU WKH VDPSOH SHULRG 7KH VWDQGDUG GHYLDWLRQV DUH FRPSXWHG XVLQJ D UROOLQJ ZLQGRZ RI WKH
PRVW UHFHQW  PRQWKV RI UHWXUQ GDWD )RU FRPSDULVRQ WKH VDPSOH VWDQGDUG GHYLDWLRQ RYHU
WKH HQWLUH SHULRG LV DOVR SORWWHG $V WKH nJXUH GHPRQVWUDWHV WKHUH DSSHDUV WR EH VXEVWDQWLDO
WLPH YDULDWLRQ LQ WKH UHWXUQ YRODWLOLW\ HVWLPDWHV RI HDFK WUDGLQJ VWUDWHJ\ &DSWXULQJ WKLV
YDULDWLRQ PD\ WKHUHIRUH \LHOG QHZ LQVLJKWV RQ WKH UHODWLRQ EHWZHHQ WKHVH VWUDWHJLHV DQG
UHWXUQ VHFRQG PRPHQWV
, PRGHO WKH FRQGLWLRQDO YRODWLOLW\ RI UHWXUQV XQGHU D JHQHUDOL]HG DXWRUHJUHVVLYH FRQGL
WLRQDO KHWHURVFHGDVWLF *$5&+ PRGHO $ W\SLFDO *$5&+S T SDUDPHWHUL]DWLRQ IRU WKH
WLPH W FRQGLWLRQDO FRYDULDQFH PDWUL[ +  LV
W

&&


S
;

$q


WbL

$ 


WbL

T
;

%+


WbM

ZKHUH & $  DQG % DUH 1 d 1  PDWULFHV RI FRQVWDQW FRHpFLHQWV DQG q

V DUH GHYLDWLRQV
RI UHDOL]HG UHWXUQV IURP WKHLU H[SHFWHG YDOXHV FRQGLWLRQDO RQ LQIRUPDWLRQ REVHUYHG WKURXJK
WLPH W b 
L

5 b (  >5 @
W

Wb

q Mj  z 1 + 

Wb

ZKHUH 5 LV DQ 1 d  YHFWRU RI DVVHW UHWXUQV DQG (  >c@ (>cMj  @ LV WKH H[SHFWDWLRQ

FRQGLWLRQDO RQ LQIRUPDWLRQ UHYHDOHG WKURXJK WLPH W b 
 ,QLWLDOO\ , XVH WKH WLPHVHULHV VDPSOH DYHUDJH UHWXUQ IURP WLPH  WR WLPH Wb IRU (W  >5W @ ,Q VXEVHTXHQW
W

Wb

Wb

WHVWV WKLV LPSOHPHQWDWLRQ PHWKRG LV FKDQJHG

7KH *$5&+ PHWKRGRORJ\ XVHV ODJJHG VTXDUH UHVLGXDO UHWXUQV DV VWDWH YDULDEOHV WR FRP
SXWH FRQGLWLRQDO FRYDULDQFH PDWULFHV ,Q DGGLWLRQ WR LWV SDUVLPRQ\ ODJJHG VTXDUH UHVLGXDOV
DOVR VHHP WR DSSUR[LPDWH UHWXUQ VHFRQG PRPHQWV TXLWH ZHOO )LJXUH  SORWV WKH UROOLQJ DY
HUDJH RI ODJJHG VTXDUHG UHVLGXDOV RI HDFK ]HURFRVW SRUWIROLR XVLQJ UHWXUQ GDWD RYHU WKH SDVW
 PRQWKV 7KH VTXDUH URRW RI WKH ODJJHG VTXDUH UHVLGXDOV DUH SORWWHG RYHU WLPH IRU HDVH RI
FRPSDULVRQ ZLWK WKH VWDQGDUG GHYLDWLRQ HVWLPDWHV $V )LJXUH  GHPRQVWUDWHV WKH ODJJHG
VTXDUH UHVLGXDOV DSSHDU KLJKO\ FRUUHODWHG ZLWK HVWLPDWHV RI UHWXUQ VHFRQG PRPHQWV +HQFH
LQ DGGLWLRQ WR DSSDUHQW WLPHYDULDWLRQ LQ UHWXUQ VHFRQG PRPHQWV WKH *$5&+ IUDPHZRUN
V
XVH RI ODJJHG VTXDUH UHVLGXDOV WR FDSWXUH WKHVH HmHFWV VHHPV UHDVRQDEOH
, HPSOR\ WKH PHWKRGRORJ\ RI /HGRLW DQG 6DQWD&ODUD  ZKRVH *$5&+ SD
UDPHWHUL]DWLRQ LV WKH IROORZLQJ
+

&  $ e q  q   % e +  

Wb

Wb

Wb

7KH SDUDPHWHUV & $ DQG % DUH HVWLPDWHG IRU HDFK SDLU RI DVVHWV 1  LQGHSHQGHQWO\
DV D VWDUWLQJ SRLQW WKHQ WKH ?GLVWDQFH )UREHQLXV QRUP EHWZHHQ HDFK RI WKHVH ELYDULDWH
HVWLPDWHV DQG WKH VSDFH RI SRWHQWLDO YDOXHV IRU & $ DQG % WKDW VDWLVI\ FRQGLWLRQV HQVXULQJ
SRVLWLYH GHnQLWH DQG FRYDULDQFH VWDWLRQDU\ PDWULFHV LV PLQLPL]HG 7KH DGYDQWDJH RI WKLV
DSSURDFK LV WKDW LW GRHV QRW LPSRVH WKH UHVWULFWLRQ WKDW $ DQG % DUH GLDJRQDO PDWULFHV DQG
HVWLPDWHV & VLPXOWDQHRXVO\ ZLWK WKH RWKHU SDUDPHWHUV ZKLFK SULRU *$5&+ WHFKQLTXHV GR
QRW 7KHVH SDUDPHWHUV DUH WKHQ XVHG WR UHFRQVWUXFW D WLPHVHULHV RI FRYDULDQFH PDWULFHV
ZKHUH WKH LGHQWLW\ PDWUL[ LV XVHG DV D VWDUWLQJ SRLQW IRU + 
7KH PRGHO LV HVWLPDWHG YLD PD[LPXP OLNHOLKRRG $VVXPLQJ WKDW WKH VKRFN q LV FRQGL
WLRQDOO\ QRUPDOO\ GLVWULEXWHG WKH ORJOLNHOLKRRG IXQFWLRQ LV
OQ/t

71
;
;
OQM+ tM b
q t + t  q t
OQ{ b

 
 
7

ZKHUH t LV WKH VHW RI SDUDPHWHUV I$ % &J

7KH FRQGLWLRQDO FRYDULDQFH PDWULFHV DUH HVWLPDWHG IRU  DVVHWV  YDOXHZHLJKWHG LQ
GXVWU\ SRUWIROLRV IRUPHG IURP WZR GLJLW 6,& FRGHV DQG LGHQWLFDO WR WKRVH LQ 0RVNRZLW]
DQG *ULQEODWW  VL[ VL]H DQG ERRNWRPDUNHW SRUWIROLRV LGHQWLFDO WR WKRVH LQ )DPD
DQG )UHQFK  XVHG WR IRUP 60 % DQG +0 / WKH &563 YDOXHZHLJKWHG LQGH[ DQG
nYH PRQWK SDVW UHWXUQ VRUWHG SRUWIROLRV ZKHUH LQGLYLGXDO VWRFNV DUH VRUWHG LQWR TXLQWLOHV
EDVHG RQ WKHLU W b  WR W b  UHWXUQV DQG YDOXHZHLJKWHG ZLWKLQ WKH TXLQWLOH JURXSV 7KH

 5HVXOWV LQ WKH SDSHU DUH UREXVW WR RWKHU LQLWLDO PDWUL[ VWDUWLQJ SRLQWV VXFK DV WKH XQFRQGLWLRQDO VDPSOH

FRYDULDQFH PDWUL[ DQG DUH UREXVW WR RWKHU *$5&+ VSHFLnFDWLRQV VXFK DV WKH DSSURDFK VXJJHVWHG E\
'LQJ DQG (QJOH 

RUGHU RI WKHVH  DVVHWV FRUUHVSRQGV WR WKH RUGHU LQ ZKLFK WKH\ DUH OLVWHG 7KXV WKH WK
URZ RU FROXPQ RI + UHSUHVHQWV WKH FRYDULDQFHV RI WKH PDUNHW SRUWIROLR ZLWK WKH RWKHU
DVVHWV DW WLPH W 7KH VL[ VL]H DQG ERRNWRPDUNHW SRUWIROLRV DUH RUGHUHG DV IROORZV VPDOO
VL]H KLJK %(0( VPDOO VL]H PHGLXP %(0( VPDOO VL]H ORZ %(0( ODUJH VL]H KLJK
%(0( ODUJH VL]H PHGLXP %(0( ODUJH VL]H ORZ %(0( 7KH nYH LQGLYLGXDO VWRFN SDVW
UHWXUQ SRUWIROLRV DUH RUGHUHG IURP ORZ WR KLJK SDVW PRQWK UHWXUQV
7KHVH  SRUWIROLRV DUH FKRVHQ WR DSSUR[LPDWH WKH FURVVVHFWLRQDO GLVSHUVLRQ LQ H[SHFWHG
UHWXUQV 7KH nQDQFH OLWHUDWXUH GRFXPHQWV WKDW D VXEVWDQWLDO SRUWLRQ RI WKH FURVVVHFWLRQDO
YDULDWLRQ LQ H[SHFWHG UHWXUQV FDQ EH FDSWXUHG E\ GLVSHUVLRQ LQ VL]H ERRNWRPDUNHW DQG
SDVW UHWXUQ VRUWHG SRUWIROLRV )RU LQVWDQFH )DPD DQG )UHQFK  GRFXPHQW WKDW FURVV
VHFWLRQDO DYHUDJH UHWXUQ GLVSHUVLRQ JHQHUDWHG IURP VL]H DQG ERRNWRPDUNHW VRUWHG SRUWIROLRV
VXEVXPHV FURVVVHFWLRQDO UHWXUQ GLVSHUVLRQ JHQHUDWHG IURP D KRVW RI RWKHU nUP FKDUDFWHU
LVWLFV )RUPLQJ D VL]H DQG ERRNWRPDUNHW IDFWRU WKH\ IXUWKHU nQG WKDW  RI WKH
WLPHVHULHV YDULDWLRQ LQ FKDUDFWHULVWLF VRUWHG SRUWIROLR UHWXUQV LV FDSWXUHG E\ WKHVH IDFWRUV
7KH RQO\ nUP FKDUDFWHULVWLF WKH )DPD)UHQFK IDFWRUV IDLO WR FDSWXUH LV WKH SDVW UHWXUQ RU
PRPHQWXP DQRPDO\ +HQFH , LQFOXGH SDVW PRQWK UHWXUQ VRUWHG SRUWIROLRV LQ WKH PDWUL[
)LQDOO\ VLQFH 0RVNRZLW] DQG *ULQEODWW  GRFXPHQW D VLJQLnFDQW PRPHQWXP HmHFW DW
WKH LQGXVWU\ OHYHO ZKLFK LV QRW FDSWXUHG E\ LQGLYLGXDO VWRFN PRPHQWXP , DOVR LQFOXGH
WKH  LQGXVWU\ SRUWIROLRV IURP 0RVNRZLW] DQG *ULQEODWW  ,Q DGGLWLRQ WKH LQGXVWU\
SRUWIROLRV SURYLGH D XVHIXO JURXSLQJ RI VWRFNV WKDW GR QRW GHSHQG RQ D SUHYLRXVO\ GLVFRYHUHG
nUP FKDUDFWHULVWLF WKDW LV UHODWHG WR DYHUDJH UHWXUQV EXW UDWKHU DWWHPSWV WR JURXS nUPV
E\ VLPLODU OLQHV RI EXVLQHVV 7KH KRSH LV WKDW WKHVH  DVVHWV UHDVRQDEO\ UHSUHVHQW FURVV
VHFWLRQDO UHWXUQ YDULDWLRQ LQ WKH HFRQRP\ /DWHU , H[DPLQH WKH UHWXUQ FRYDULDQFH PDWUL[ RI
LQGLYLGXDO VWRFNV IRU UREXVWQHVV
W

%

&RQGLWLRQDO $VVHW 3ULFLQJ 0RGHOV

5DWKHU WKDQ LQWHUSUHW WKH WUDGLQJ VWUDWHJLHV DV SURnWDEOH ZD\V WR H[SORLW PLVSULFLQJ VHYHUDO
SDSHUV LQFOXGLQJ )DPD DQG )UHQFK   DQG &DUKDUW  KDYH HPSOR\HG WKHP DV
SUR[LHV IRU XQGHUO\LQJ VWDWH YDULDEOHV WKDW UHSUHVHQW WKH FKDQJLQJ LQYHVWPHQW RSSRUWXQLW\
VHW RU WKDW UHSUHVHQW ?IDFWRUPLPLFNLQJ SRUWIROLRV LQ DQ $37 VHWWLQJ 7KURXJKRXW WKH
SDSHU , HPSOR\ VHYHUDO DVVHW SULFLQJ PRGHOV ZKLFK LQFRUSRUDWH WKHVH ?IDFWRUPLPLFNLQJ
SRUWIROLRV GHULYHG IURP nUP FKDUDFWHULVWLFV DQG GHYHORS WZR DGGLWLRQDO PRGHOV ZKLFK DLG
LQ GHWHUPLQLQJ ZKHWKHU WKHVH VWUDWHJLHV DUH UHDVRQDEOH SUR[LHV IRU ULVN 7KLV VHFWLRQ EULHo\
GHVFULEHV WKH YDULRXV SULFLQJ PRGHOV HPSOR\HG LQ WKH SDSHU

%

)DPD DQG )UHQFK  7KUHH )DFWRU 0RGHO

7KH nUVW PRGHO LV D FRQGLWLRQDO YHUVLRQ RI )DPD DQG )UHQFK

V  WKUHH IDFWRU PRGHO
ZKLFK LQFOXGHV WKH PDUNHW D VL]H IDFWRU SRUWIROLR 60 % DQG D ERRNWRPDUNHW IDFWRU
SUR[LHG E\ +0 / 7KH PRGHO LV UHSUHVHQWHG DV IROORZV
n >5

5 bU u
W

IW

PW

b U @  n 60 %  n +0/  q 
IW

nW)) s >n  n  n @
W

+ ZZ + Z  


W

ZKHUH 5 LV WKH 1 d  YHFWRU RI DVVHW UHWXUQV U LV WKH ULVNIUHH UDWH DW WLPH W PRQWK
7ELOO UDWH q DUH WKH UHVLGXDOV DW WLPH W n DUH WKH FRHpFLHQW YHFWRUV RQ HDFK RI WKH
IDFWRUV + LV WKH *$5&+HVWLPDWHG FRQGLWLRQDO FRYDULDQFH PDWUL[ DW WLPH W DQG Z LV DQ
1 d  PDWUL[ RI ]HURV ZLWK D  LQ WKH WK URZ RI WKH nUVW FROXPQ  LQ WKH VW  QG 
DQG UG URZV DQG b  LQ WKH WK  WK  DQG WK URZV RI WKH VHFRQG FROXPQ DQG  LQ
WKH VW DQG WK URZV DQG b  LQ WKH UG DQG WK URZV RI WKH WKLUG FROXPQ
W

IW

NW

%

&DUKDUW  )RXU )DFWRU 0RGHO

7KH VHFRQG PRGHO LV D FRQGLWLRQDO YHUVLRQ RI &DUKDUW

V  IRXU IDFWRU PRGHO ZKLFK
DGGV WKH PRPHQWXP IDFWRU 3 5< 5 WR WKH )DPD DQG )UHQFK  PRGHO 7KH PRGHO LV
UHSUHVHQWHG DV IROORZV
n >5 b U @  n 60 %  n +0 /  n 3 5< 5  q 
&DU
nW
s >n  n  n  n @ + ZZ + Z   W

5 bU u
W

IW

PW

IW




ZKHUH Z LV DQ 1 d  PDWUL[ ZKRVH nUVW WKUHH FROXPQV DUH DV GHVFULEHG DERYH IRU WKH )DPD
DQG )UHQFK  PRGHO DQG ZKRVH IRXUWK FROXPQ LV D YHFWRU RI ]HURV ZLWK D  LQ WKH QG
URZ DQG D b LQ WKH WK URZ
%

,QGXVWU\ 0RPHQWXP )RXU )DFWRU 0RGHO

7KH WKLUG PRGHO UHSODFHV WKH &DUKDUW  PRPHQWXP IDFWRU 3 5< 5 ZLWK DQ LQGXVWU\
PRPHQWXP IDFWRU ,0 7KH PRGHO LV UHSUHVHQWHG DV IROORZV
5 bU u
W

IW

n >5
W

PW

b U @  n 60 %  n +0 /  n ,0  q 
IW

nW0R s >n  n  n  n @
W

+ Z Z + Z   


W




ZKHUH Z LV DQ 1 d  PDWUL[ ZKRVH nUVW WKUHH FROXPQV DUH DV GHVFULEHG DERYH IRU WKH
)DPD DQG )UHQFK  PRGHO DQG ZKRVH IRXUWK FROXPQ LV D YHFWRU RI ]HURV ZLWK  LQ
HDFK RI WKH URZV FRUUHVSRQGLQJ WR WKH WKUHH LQGXVWULHV ZKLFK H[KLELWHG WKH KLJKHVW UHWXUQV
W



RYHU WKH SULRU  PRQWKV IURP W b  WR W b  DQG b  LQ WKH URZV FRUUHVSRQGLQJ WR WKH
WKUHH LQGXVWULHV ZKLFK H[KLELWHG WKH ORZHVW UHWXUQV RYHU WKH SDVW \HDU
,Q DGGLWLRQ WR WKH IDFWRUV GHULYHG IURP WKH DQRPDOLHV RI VL]H ERRNWRPDUNHW DQG
PRPHQWXP , HPSOR\ WZR PRGHOV ZKLFK GHYHORS IDFWRUV IURP D SXUHO\ VWDWLVWLFDO FRQVWUXFW
GHVLJQHG WR FDSWXUH WKH PD[LPDO DPRXQW RI UHWXUQ YDULDWLRQ
%

&RQGLWLRQDO 3ULQFLSDO &RPSRQHQWV 0RGHO 3&

7KH nUVW PRGHO H[WUDFWV WKH nUVW IRXU SULQFLSDO FRPSRQHQWV IURP +   UHVFDOHV WKH HLJHQ
YHFWRUV WR VXP WR RQH WR IRUP SRUWIROLR ZHLJKWV DQG PXOWLSOLHV WKH UHVFDOHG ZHLJKWV E\ WKH
H[FHVV UHWXUQ YHFWRU DW WLPH W , FRPSXWH WKH SULQFLSDO FRPSRQHQWV SULFLQJ IDFWRU ZHLJKWV
DW WLPH W b  DQG DSSO\ WKHP WR WLPH W UHWXUQV LQ RUGHU WR WHVW KRZ ZHOO WKH SULQFLSDO
FRPSRQHQWV IDFWRUV SHUIRUP RXW RI VDPSOH VLQFH E\ FRQVWUXFWLRQ WKH\ FDSWXUH WKH JUHDW
HVW DPRXQW RI UHWXUQ YDULDWLRQ RI DQ\ IRXU IDFWRUV LQ VDPSOH 6SHFLnFDOO\ WKH PRGHO LV
UHSUHVHQWHG DV IROORZV
Wb

5 bU u
W

IW

nW3&

nW3& 3&W  q 



+ Z  Z  + Z    


Wb

W

Wb

Wb



ZKHUH Z  LV DQ 1 d  PDWUL[ ZKRVH FROXPQV DUH WKH VFDOHG WR VXP WR RQH HLJHQYHFWRUV
DVVRFLDWHG ZLWK WKH IRXU ODUJHVW HLJHQYDOXHV RI +   DQG 3&W LV WKH d YHFWRU RI SULQFLSDO
FRPSRQHQWV IDFWRU UHDOL]DWLRQV DW WLPH W LH 3&W
Z  >5 b U u@ ,Q DGGLWLRQ , XVH
WKH ZLWKLQ VDPSOH SULQFLSDO FRPSRQHQWV IDFWRUV LH H[WUDFW WKH HLJHQYHFWRUV DVVRFLDWHG
ZLWK WKH IRXU ODUJHVW HLJHQYDOXHV DW WLPH W IURP +  IRU VXEVHTXHQW WHVWV LQ WKH SDSHU 7KH
ZLWKLQ VDPSOH SULQFLSDO FRPSRQHQWV IDFWRUV DFFRXQW IRU RYHU  RI WKH YDULDWLRQ RI WKH
DVVHW UHWXUQV DQG WKXV DUH HPSOR\HG DV D EHQFKPDUN IRU ULVN ODWHU LQ WKH SDSHU
Wb

Wb

Wb

IW

%

8QFRQGLWLRQDO 3ULQFLSDO &RPSRQHQWV 0RGHO 83&

,Q DGGLWLRQ , WDNH WKH nUVW IRXU SULQFLSDO FRPSRQHQWV IURP WKH XQFRQGLWLRQDO VDPSOH FRYDUL
DQFH PDWUL[ RI WKH  SRUWIROLR UHWXUQV 7KH HLJHQYHFWRUV DVVRFLDWHG ZLWK WKH IRXU ODUJHVW
HLJHQYDOXHV DUH UHVFDOHG WR VXP WR RQH DQG WKHVH SRUWIROLR ZHLJKWV DUH WKHQ KHOG FRQVWDQW
RYHU WLPH DQG DSSOLHG WR WKH H[FHVV UHWXUQV YHFWRU DW WLPH W 2EYLRXVO\ WKLV PRGHO ZLOO QRW
EH WHVWHG RXW RI VDPSOH EXW PD\ SURYLGH DQ LQWHUHVWLQJ EHQFKPDUN IURP ZKLFK WR FRPSDUH
WKH RWKHU PRGHOV 7KH SXUSRVH RI HPSOR\LQJ WKLV PRGHO LV WR WHVW KRZ ZHOO WKH XQFRQGLWLRQDO
 7KH SHUFHQWDJH RI UHWXUQ YDULDWLRQ FDSWXUHG E\ WKH nUVW IRXU SULQFLSDO FRPSRQHQWV IDFWRUV LV FDOFXODWHG

E\ VXPPLQJ WKH VTXDUHG HLJHQYDOXHV RI WKH PDWUL[ qW qW IURP HTXDWLRQ  GLYLGLQJ LW E\ WKH VXP RI VTXDUHG
HLJHQYDOXHV RI WKH UDZ FRYDULDQFH PDWUL[ +W  DQG VXEWUDFWLQJ IURP RQH



IDFWRUV SHUIRUP FRQGLWLRQDOO\ 7KDW LV ZH NQRZ WKHVH IRXU IDFWRUV nW WKH XQFRQGLWLRQDO FR
YDULDQFH PDWUL[ EHWWHU WKDQ DQ\ RWKHU IRXU IDFWRUV E\ FRQVWUXFWLRQ EXW WKH\ PD\ SHUIRUP
SRRUO\ DW VSHFLnF SRLQWV LQ WLPH SRVVLEO\ LJQRULQJ LPSRUWDQW FKDQJHV LQ ULVN RYHU WLPH 7KH
PRGHO LV SUHVHQWHG DV IROORZV
5 bU u
W

IW

nW83&

nW83& 83&W  q 
+ ZZ + Z  




W



ZKHUH Z LV DQ 1 d  PDWUL[ ZKRVH FROXPQV DUH WKH VFDOHG WR VXP WR RQH HLJHQYHFWRUV
DVVRFLDWHG ZLWK WKH IRXU ODUJHVW HLJHQYDOXHV RI WKH XQFRQGLWLRQDO VDPSOH FRYDULDQFH PDWUL[
KHQFH WKH ODFN RI WLPH VXEVFULSWV RQ Z DQG 83&W LV WKH  d  YHFWRU RI SULQFLSDO
FRPSRQHQWV IDFWRU UHDOL]DWLRQV DW WLPH W LH 83&W Z >5 b U u@


&

IW

&RQGLWLRQDO 6SDQQLQJ 7HVWV

,W LV LQWHUHVWLQJ WR H[DPLQH ZKHWKHU WKH VWUDWHJLHV VSDQ HDFK RWKHU DQG ZKHWKHU WKH\ DUH
VSDQQHG E\ WKH SULQFLSDO FRPSRQHQWV PRGHOV 3UHYLRXV HYLGHQFH LQ WKLV SDSHU DQG LQ RWKHU
VWXGLHV LQFOXGLQJ -HJDGHHVK DQG 7LWPDQ  /DNRQLVKRN 6KOHLIHU DQG 9LVKQ\ 
DQG )DPD DQG )UHQFK  nQG OLWWOH FRUUHODWLRQ EHWZHHQ WKHVH VWUDWHJLHV +RZHYHU WKHVH
VWXGLHV DVVXPH WKDW WKH VHFRQG PRPHQWV RI WKHVH VWUDWHJLHV DUH FRQVWDQW RYHU WLPH ,Q WKLV
VHFWLRQ , DOORZ IRU WLPHYDULDWLRQ LQ WKH YRODWLOLW\ DQG FRUUHODWLRQ RI WKH VWUDWHJLHV
UHWXUQV
'DQLHO DQG 7LWPDQ  %UHQQDQ &KRUGLD DQG 6XEUDKPDQ\DP  DQG *UXQG\
DQG 0DUWLQ  DOVR DOORZ IRU FKDQJLQJ IDFWRU ORDGLQJV RYHU WLPH EXW WKHVH SDSHUV
HVWLPDWH WLPHYDU\LQJ ORDGLQJV YLD UROOLQJ OHDVW VTXDUHV UHJUHVVLRQV ZKLFK HPSOR\ WKH SULRU
 \HDUV RI GDWD , WDNH D GLmHUHQW DSSURDFK XWLOL]LQJ WKH *$5&+HVWLPDWHG FRYDULDQFH
PDWULFHV ZKLFK PD\ SURYLGH D PRUH DFFXUDWH SLFWXUH RI FRQGLWLRQDO YRODWLOLW\
)LJXUH  SORWV WKH *$5&+HVWLPDWHG PDUNHW nV RI WKH VWUDWHJLHV RYHU WLPH DJDLQVW UROOLQJ
UHJUHVVLRQ n HVWLPDWHV ZKLFK XVH WKH SULRU  PRQWKV RI UHWXUQV $V WKH nJXUH VKRZV WKH
*$5&+HVWLPDWHG nV DUH VLJQLnFDQWO\ GLmHUHQW IURP WKH UROOLQJ UHJUHVVLRQ HVWLPDWHV &RU
UHODWLRQV EHWZHHQ WKH HVWLPDWHV IRU HDFK VWUDWHJ\ DUH VXUSULVLQJO\ ORZ 2QO\ IRU 60% LV
WKHUH VLJQLnFDQW SRVLWLYH FRUUHODWLRQ EHWZHHQ *$5&+ DQG UHJUHVVLRQ HVWLPDWHG nV ,Q DGGL
WLRQ WKH UHJUHVVLRQ nV DUH JHQHUDOO\ PXFK PRUH VPRRWK WKDQ WKH *$5&+ HVWLPDWHV GHVSLWH
WKH IDFW WKDW WKH *$5&+ PHWKRGRORJ\ VPRRWKV YDULDQFHFRYDULDQFH HVWLPDWHV RYHU WLPH E\
FRQVWUXFWLRQ 7KLV VXJJHVWV WKDW UHJUHVVLRQHVWLPDWHG EHWDV PD\ EH PLVVLQJ LPSRUWDQW LQ
IRUPDWLRQ DERXW WKH FKDQJLQJ ULVNV RI WKHVH VWUDWHJLHV RYHU WLPH DQG WKH *$5&+ HVWLPDWHV
PD\ SURYLGH D PRUH DFFXUDWH SLFWXUH RI UHWXUQ YRODWLOLW\ $W WKH YHU\ OHDVW WKH *$5&+
ORDGLQJV SURYLGH D XQLTXH VHW RI HVWLPDWHV WR H[DPLQH WKH SURnWDELOLW\ DQG YRODWLOLW\ RI WKH
VWUDWHJLHV


7R WHVW ZKHWKHU WKH SURSRVHG SULFLQJ PRGHOV LQ VXEVHFWLRQ % FDQ FDSWXUH WKH YDULRXV
DQRPDOLHV RQFH , DOORZ IRU WLPHYDU\LQJ ULVN , FRPSXWH WKH UHVLGXDO UHWXUQV RI WKH WUDGLQJ
VWUDWHJLHV XQGHU HDFK RI WKH PRGHOV ZKHUH IDFWRU ORDGLQJV DUH H[WUDFWHG IURP WKH *$5&+
HVWLPDWHG FRYDULDQFH PDWULFHV )RU LQVWDQFH WKH UHVLGXDO UHWXUQV IRU WKH LQGXVWU\ PRPHQWXP
VWUDWHJ\ XQGHU WKH &$30 DOORZLQJ IRU WLPHYDU\LQJ ULVN DUH
,0 b nA >5
W

PW

bU @
IW



ZKHUH nA LV WKH HVWLPDWHG IDFWRU ORDGLQJ RI ,0 RQ WKH PDUNHW DW WLPH W QRWH WKDW nA LV
FRPSXWHG IURP +  ZKLFK LV D IRUHFDVWHG FRYDULDQFH PDWUL[ EDVHG RQ UHWXUQ UHDOL]DWLRQV XS
WR WLPH W b  KHQFH nA GRHV QRW GHSHQG RQ WLPH W UHWXUQV 7KH VDPH SURFHVV LV UHSHDWHG
IRU WKH RWKHU SULFLQJ PRGHOV DQG IRU WKH RWKHU VWUDWHJLHV
7KH UHVXOWV DUH UHSRUWHG LQ 7DEOH , $V WKH 7DEOH GHPRQVWUDWHV RQO\ DERXW  RI
WKH LQGXVWU\ PRPHQWXP SURnWV DUH DFFRXQWHG IRU E\ DQ\ RI WKH SULFLQJ PRGHOV DQG WKH
XQFRQGLWLRQDO SULQFLSDO FRPSRQHQWV VLJQLnFDQWO\ H[DJJHUDWH WKH SURnWV 0RUH LQWHUHVWLQJO\
KRZHYHU LV WKH IDFW WKDW WKH VL]H RI WKH UHVLGXDO PRPHQWXP SURnWV DUH LQYHUVHO\ UHODWHG
WR WKH VWDQGDUG GHYLDWLRQ RI WKH SURnWV DV HYLGHQFHG E\ WKH WVWDWV VXJJHVWLQJ WKDW WKH
PRGHOV PD\ QRW EH DFFRXQWLQJ IRU D FRPSRQHQW RI ULVN /LNHZLVH WKH LQGLYLGXDO VWRFN
PRPHQWXP SURnWV 3 5< 5 DSSHDU XQDFFRXQWHG IRU E\ DQ\ RI WKH PRGHOV LQFOXGLQJ WKH
IRXU IDFWRU LQGXVWU\ PRPHQWXP PRGHO ZKLFK UHGXFHV WKH SURnWV E\ DERXW  60 %
ZKLFK LV IDLUO\ ZHDN RYHU WKH VDPSOH SHULRG DQG RQO\ PDUJLQDOO\ VLJQLnFDQW DSSHDUV WR EH
VXEVXPHG E\ WKH XQFRQGLWLRQDO SULQFLSDO FRPSRQHQWV IDFWRUV +0 / RQ WKH RWKHU KDQG
VHHPV WR EH H[DJJHUDWHG E\ ERWK SULQFLSDO FRPSRQHQWV PRGHOV DQG LV TXLWH VWURQJ RYHU WKH
VDPSOH SHULRG
7KXV WKH SURnWDELOLW\ RI WKHVH WUDGLQJ VWUDWHJLHV DUH QRW FDSWXUHG E\ WKH IDFWRU PRGHOV
HYHQ ZKHQ ZH DFFRXQW IRU WLPHYDULDWLRQ LQ WKH IDFWRU ORDGLQJV 7KH TXHVWLRQ UHPDLQV
KRZHYHU ZKHWKHU WKH DQRPDORXV UHWXUQV DVVRFLDWHG ZLWK WKHVH VWUDWHJLHV DUH JHQHUDWHG
IURP DQ XQVSHFLnHG VRXUFH RI V\VWHPDWLF ULVN 7KH UHPDLQGHU RI WKH SDSHU DGGUHVVHV WKLV
TXHVWLRQ E\ H[DPLQLQJ WKH OLQN EHWZHHQ WKHVH DQRPDOLHV DQG WKH FRYDULDQFH PDWUL[ RI DVVHW
UHWXUQV 7KLV $37LQVSLUHG DQDO\VLV PD\ KHOS VKHG OLJKW RQ ZKHWKHU WKHVH DQRPDOLHV DUH
GULYHQ E\ V\VWHPDWLF YDULDWLRQ RU DUH WKH UHVXOW RI QRQULVN EDVHG SKHQRPHQD VXFK DV LQYHVWRU
VHQWLPHQW DQG EHKDYLRU RU GDWD PLQLQJ
 7KLV LV FRQVLVWHQW ZLWK WKH nQGLQJV RI 0RVNRZLW] DQG *ULQEODWW 
W



,,,

7KH &RQWULEXWLRQ WR &RYDULDQFH 5LVN

,Q WKLV VHFWLRQ , H[DPLQH KRZ PXFK RI WKH FRYDULDQFH PDWUL[ RI DVVHW UHWXUQV HDFK RI WKH
WUDGLQJ VWUDWHJLHV DQG SURSRVHG SULFLQJ PRGHOV IURP 6HFWLRQ ,, FDSWXUHV 1XPHURXV VWXGLHV
KDYH HYDOXDWHG WKH H[SODQDWRU\ SRZHU RI VL]H ERRNWRPDUNHW DQG PRPHQWXP IRU SUHGLFWLQJ
WKH FURVVVHFWLRQ RI H[SHFWHG UHWXUQV EXW QRQH KDYH GRFXPHQWHG WKHLU H[SODQDWRU\ SRZHU
IRU SUHGLFWLQJ VHFRQG PRPHQWV

$

&DSWXULQJ &RYDULDQFHV

:H EHJLQ E\ H[DPLQLQJ KRZ PXFK HDFK RI WKH WUDGLQJ VWUDWHJLHV DQG SULFLQJ PRGHOV FRQ
WULEXWHV WR FRQGLWLRQDO YRODWLOLW\ DV HVWLPDWHG E\ WKH *$5&+ FRYDULDQFH PDWULFHV + 
+HUH , HVWLPDWH WKH FRYDULDQFH PDWULFHV XVLQJ WKH VDPSOH PHDQ XS WR WLPH W b  DV DQ
DSSUR[LPDWLRQ IRU WKH PHDQ RI WKH DVVHW UHWXUQV IROORZLQJ HTXDWLRQV  DQG  , WKHQ GH
FRPSRVH WKH PDWULFHV LQWR D V\VWHPDWLF SRUWLRQ DQG D QRQV\VWHPDWLF RU UHVLGXDO SRUWLRQ
LPSOLHG E\ HDFK PRGHO RU IDFWRU )RU LQVWDQFH XQGHU WKH )DPD DQG )UHQFK  WKUHH
IDFWRU PRGHO
nW h nW  l

+
W

ZKHUH h LV WKH  d  FRYDULDQFH PDWUL[ RI WKH )DPD DQG )UHQFK  IDFWRUV DQG l
LV WKH  d  UHVLGXDO FRYDULDQFH PDWUL[ LPSOLHG E\ WKH )DPD DQG )UHQFK  PRGHO
DW WLPH W , WKHQ WHVW KRZ FORVHO\ WKH V\VWHPDWLF SRUWLRQ nW h nW  RI WKH FRYDULDQFH PDWUL[
WUDFNV WKH CWUXH
FRYDULDQFH PDWUL[ RXW RI VDPSOH
:H GHnQH WKH CWUXH
FRYDULDQFH PDWUL[ DV 9   DQG XVH WZR SUR[LHV IRU WKH WUXH FRYDULDQFH
PDWUL[  +  ^ WKH PXOWLYDULDWH *$5&+ HVWLPDWHG PDWUL[ ZKLFK XVHV WKH VDPSOH
PHDQ IURP WLPH  WR WLPH W WR FRPSXWH UHVLGXDO UHWXUQV LQ HTXDWLRQ  DQG  +  ^ D
*$5&+ HVWLPDWHG PDWUL[ XVLQJ DOO DYDLODEOH IDFWRUV WR HVWLPDWH q  7KH VHFRQG SUR[\
HVWLPDWHV UHVLGXDOV XVLQJ DOO DYDLODEOH LQIRUPDWLRQ IURP DOO IDFWRUV LH q
5 bn 0NW b
U  b n 60%  b n +0 /  b n W3 5< 5  b n ,0  b n 3 &  b n
83 & 
ZKHUH WKH EHWDV DUH H[WUDFWHG IURP WKH SUHYLRXV SHULRG
V FRYDULDQFH PDWUL[ HVWLPDWH
:H FDOFXODWH WKH V\VWHPDWLF SRUWLRQ RI WKH FRYDULDQFH PDWUL[ LPSOLHG E\ HDFK PRGHO DV
W

I XOO

IW

9A

A nA
nAW h
W


3&

83&



A DUH H[WUDFWHG IURP +  DQG PHDVXUH KRZ IDU DZD\ WKH HVWLPDWHV DUH IURP
ZKHUH nA DQG h
9   WKH CWUXH
FRYDULDQFH PDWUL[ 1RWH WKDW 9A LV EDVHG VROHO\ RQ UHWXUQ UHDOL]DWLRQV XS WR
WLPH W b  DQG LV XVHG WR SUHGLFW 9   QH[W SHULRG
V HVWLPDWH RI WKH WUXH FRYDULDQFH PDWUL[
,Q DGGLWLRQ 9A RQO\ FDSWXUHV WKH V\VWHPDWLF SRUWLRQ RI WKH FRYDULDQFH PDWUL[ LPSOLHG E\
W



HDFK IDFWRU PRGHO DW WLPH W +HQFH , PHDVXUH KRZ PXFK RI WKH FRYDULDQFH PDWUL[ HDFK RI
WKH SURSRVHG IDFWRU PRGHOV FDSWXUHV RXW RI VDPSOH 7KH IROORZLQJ WKUHH GLVWDQFH PHWULFV
RI WUDFNLQJ HUURU DUH HPSOR\HG WR TXDQWLI\ WKH DELOLW\ RI HDFK IDFWRU PRGHO WR FDSWXUH WKH
IXWXUH FRYDULDQFH PDWUL[
Y
X
X
W

'

WUDFHI9A  J
WUDFHI9  J



'

Y
X
X WUDFHI9W
W

b 9A  J
WUDFHI9   J
WUDFHIM9  b 9A MJ
b

WUDFHIM9  MJ
b



'



7KH nUVW GLVWDQFH PHWULF '  PHDVXUHV WKH IUDFWLRQ RI WKH WUXH FRYDULDQFH PDWUL[ 9  
FDSWXUHG E\ HDFK PRGHO 9A  6LQFH WKH WUDFH RI D PDWUL[ HTXDOV WKH VXP RI LWV HLJHQYDOXHV
' UHSUHVHQWV WKH VXP RI WKH HLJHQYDOXHV RI WKH VTXDUHG PDWUL[ 9A  DV D IUDFWLRQ RI WKH VXP
RI WKH HLJHQYDOXHV RI WKH WUXH VTXDUHG PDWUL[ ZKHUH WKH VXP RI WKH HLJHQYDOXHV PHDVXUHV
WKH WRWDO DPRXQW RI YDULDWLRQ FDSWXUHG E\ WKH PDWUL[ , VTXDUH HOHPHQW E\ HOHPHQW WKH
PDWULFHV WR FDSWXUH WKH DEVROXWH DPRXQW RI YDULDWLRQ LQ WKH HFRQRP\ 7KH VHFRQG PHWULF '
PHDVXUHV WKH DJJUHJDWH VTXDUHG GHYLDWLRQ IURP WKH WUXH FRYDULDQFH PDWUL[ ,I 9A WUDFNV 9 
FORVHO\ WKHQ ' VKRXOG EH FORVH WR ]HUR ,Q RWKHU ZRUGV 9  b9A  LV WKH PDWUL[ RI FRYDULDQFH
WUDFNLQJ HUURUV DQG WUDFHI9  b 9A  J LV WKH VXP RI VTXDUHG WUDFNLQJ HUURUV LI ZH ZHUH WR
WUDQVIRUP WKH PDWUL[ RI VTXDUHG WUDFNLQJ HUURUV LQWR 1 RUWKRJRQDO FRPSRQHQWV , VFDOH WKLV
VXP E\ WKH VXP RI WKH HLJHQYDOXHV RI WKH VTXDUHG WUXH FRYDULDQFH PDWUL[ UHSUHVHQWLQJ WKH
WRWDO DPRXQW RI UHWXUQ YDULDWLRQ DPRQJ WKH 1 DVVHWV DQG VXEWUDFW LW IURP RQH 7KHUHIRUH
' DOVR PHDVXUHV WKH IUDFWLRQ RI WRWDO YDULDWLRQ FDSWXUHG E\ 9A  )LQDOO\ ' H[DPLQHV WKH
DEVROXWH UDWKHU WKDQ VTXDUHG GHYLDWLRQV IURP WKH WUXH FRYDULDQFH PDWUL[
3DQHO $ RI 7DEOH ,, UHSRUWV WKH WLPHVHULHV PHDQV RI WKH WKUHH GLVWDQFH PHWULFV IRU HDFK RI
WKH WUDGLQJ VWUDWHJLHV DQG IDFWRU PRGHOV 7KH PDJQLWXGHV RI WKH PHWULFV SURYLGH D UDQNLQJ
IRU KRZ ZHOO HDFK RI WKH SURSRVHG IDFWRUV DQG PRGHOV SUHGLFWV IXWXUH FRYDULDQFHV $V WKH
WDEOH LQGLFDWHV WKH PDUNHW SRUWIROLR FRPSULVHV WKH ODUJHVW FRPSRQHQW RI FRYDULDQFH ULVN RXW
RI VDPSOH RI DQ\ VLQJOH IDFWRU 8VLQJ +  DV WKH EHQFKPDUN IRU WKH WUXH FRYDULDQFH PDWUL[
RI DVVHW UHWXUQV LQ WKH HFRQRP\ , nQG WKDW FRYDULDWLRQ ZLWK WKH PDUNHW HQFRPSDVVHV QHDUO\
 RI WRWDO YDULDWLRQ 8QGHU WKH +  HVWLPDWH IRU WUXH FRYDULDQFHV ZKLFK LQFRUSRUDWHV
HYHU\WKLQJ ZH NQRZ DERXW SUHGLFWLQJ PHDQ UHWXUQV WKH PDUNHW FRPSULVHV RYHU  RI WKH
FRQGLWLRQDO FRYDULDQFH PDWULFHV RQ DYHUDJH )XUWKHUPRUH WKHVH PHDVXUHV DUH ZHOO ZLWKLQ
VWDWLVWLFDO VLJQLnFDQFH ERXQGV LQGLFDWHG E\ WKH ERRWVWUDSSHG VWDQGDUG HUURUV IRU WKHVH
PHDVXUHV ,Q DGGLWLRQ 60% DOVR DSSHDUV WR FRQWULEXWH VLJQLnFDQWO\ WR WRWDO YDULDWLRQ
W

I XOO



RYHU WLPH FDSWXULQJ URXJKO\  RI WRWDO YDULDWLRQ UHODWLYH WR +   DQG URXJKO\ 
UHODWLYH WR +   ERWK RI ZKLFK DUH VWDWLVWLFDOO\ GHWHFWDEOH +RZHYHU +0 / 3 5< 5 DQG
,0 FRQWULEXWH QHJOLJLEO\ WR WRWDO YDULDWLRQ ,Q DGGLWLRQ ' ' DQG ' JHQHUDWH VLPLODU
UHVXOWV RQ WKH FRQWULEXWLRQ RI HDFK VWUDWHJ\ RU IDFWRU WR WRWDO FRYDULDWLRQ LQ WKH HFRQRP\
([DPLQLQJ WKH PXOWLIDFWRU PRGHOV IURP 6HFWLRQ ,, ZH VHH WKDW WKH )DPD DQG )UHQFK
 IDFWRUV FDSWXUH DERXW  RI WKH +  FRQGLWLRQDO FRYDULDQFH PDWULFHV RQ DYHUDJH
DQG DOPRVW  RI WKH +  PDWULFHV D VLJQLnFDQW LQFUHDVH IURP WKH PDUNHW IDFWRU DORQH
VXJJHVWLQJ WKDW 60% DQG +0 / LQ FRPELQDWLRQ ZLWK WKH PDUNHW SURYLGH VXEVWDQWLDOO\ PRUH
H[SODQDWRU\ SRZHU IRU GHVFULELQJ IXWXUH ULVN +RZHYHU DGGLQJ WKH WZR PRPHQWXP IDFWRUV
,0 DQG 3 5< 5 UHVSHFWLYHO\ WR WKH )DPD DQG )UHQFK  PRGHO QHJOLJLEO\ LQFUHDVHV
WKH FRQWULEXWLRQ WR FRYDULDQFH ULVN VXJJHVWLQJ WKDW QHLWKHU PRPHQWXP YDULDEOH DGGV PXFK
H[SODQDWRU\ SRZHU IRU IXWXUH FRYDULDQFHV 7KXV ZKHWKHU LQ LVRODWLRQ RU LQ FRPELQDWLRQ
ZLWK WKH PDUNHW VL]H DQG ERRNWRPDUNHW IDFWRUV WKH SURSRVHG PRPHQWXP IDFWRUV GR QRW
DSSHDU WR GHVFULEH IXWXUH FRYDULDQFHV
7KH nQDO WZR IDFWRU PRGHOV WKRVH FRQVWUXFWHG YLD SULQFLSDO FRPSRQHQWV DQDO\VLV SHU
IRUP SRRUO\ LQ FDSWXULQJ IXWXUH FRYDULDQFHV GHVSLWH WKH IDFW WKDW E\ FRQVWUXFWLRQ WKH
FRQGLWLRQDO SULQFLSDO FRPSRQHQWV PRGHO 3& SHUIRUPV WKH EHVW RI DQ\ RWKHU IRXU IDFWRUV LQ
VDPSOH /LNHZLVH WKH XQFRQGLWLRQDO SULQFLSDO FRPSRQHQWV 83& DUH GHVLJQHG WR FDSWXUH
WKH JUHDWHVW DPRXQW RI YDULDWLRQ RI DQ\ IRXU IDFWRUV UHODWLYH WR WKH XQFRQGLWLRQDO VDPSOH
FRYDULDQFH PDWUL[ EXW DV 7DEOH ,, LQGLFDWHV WKH SHUIRUPDQFH RI WKHVH IDFWRUV RQ WKH FRQ
GLWLRQDO FRYDULDQFH PDWUL[ LV YHU\ SRRU FDSWXULQJ D VWDWLVWLFDOO\ XQGHWHFWDEOH DPRXQW RI
YDULDWLRQ LQ DVVHW UHWXUQV 7KXV WKHVH VWDWLVWFDOO\ FRQVWUXFWHG IDFWRUV DSSHDU WR SHUIRUP
IDU ZRUVH RXW RI VDPSOH WKDQ SUHGHWHUPLQHG HFRQRPLF YDULDEOHV VXFK DV WKH PDUNHW VL]H
DQG ERRNWRPDUNHW
)LQDOO\ , DOVR IRUP CUDQGRP
IDFWRUV E\ DVVLJQLQJ UDQGRP SRUWIROLR ZHLJKWV WR WKH 
DVVHWV DQG IRUPLQJ IRXU ]HURLQYHVWPHQW VWUDWHJLHV XVLQJ WKH UDQGRP ZHLJKWV $V 7DEOH ,,
VKRZV WKHVH UDQGRP IDFWRUV FDSWXUH D VPDOO IUDFWLRQ RI WKH FRYDULDQFH PDWUL[ DQG H[KLELW
ODUJH VWDQGDUG HUURUV +RZHYHU WKH RQO\ IDFWRU PRGHOV IRU ZKLFK , FDQ UHMHFW WKH QXOO WKDW
WKH FRQWULEXWLRQ WR WRWDO FRYDULDWLRQ LV WKH VDPH DV D VHW RI UDQGRPO\ JHQHUDWHG IDFWRUV LV WKH
PDUNHW )DPD)UHQFK PRGHO IRXU IDFWRU LQGXVWU\ PRPHQWXP PRGHO DQG &DUKDUW 
PRGHO HJ DOO WKH PRGHOV WKDW FRQWDLQ WKH PDUNHW 60% DQG +0 /
W

I XOO

I XOO

%

&DSWXULQJ &RUUHODWLRQV

,W LV DOVR LQWHUHVWLQJ WR H[DPLQH ZKHWKHU WKH DERYH IDFWRUV KHOS IRUHFDVW IXWXUH FRUUHODWLRQV
LQ RUGHU WR GHWHUPLQH ZKHWKHU WKH SUHGLFWLYH DELOLW\ RU ODFN RI RI WKHVH IDFWRUV LQ IRUHFDVWLQJ


FRYDULDQFHV LV GXH WR WKHLU DELOLW\ WR FDSWXUH FRUUHODWLRQV DPRQJ WKH DVVHWV RU ZKHWKHU WKH\
DUH VLPSO\ JRRG RU EDG DW IRUHFDVWLQJ YDULDQFHV
7R PHDVXUH WKH DELOLW\ RI WKHVH IDFWRUV IRU SUHGLFWLQJ IXWXUH FRUUHODWLRQV , UXQ VLPLODU
WHVWV WR WKRVH LQ WKH SUHYLRXV VHFWLRQ $JDLQ , FRPSDUH DQ HVWLPDWHG FRUUHODWLRQ PDWUL[
LPSOLHG E\ D IDFWRU PRGHO WR WKH WUXH FRUUHODWLRQ PDWUL[ )RU EUHYLW\ , XVH +  DV WKH
DSSUR[LPDWLRQ IRU WKH WUXH FRYDULDQFH PDWUL[ LQ WKH HFRQRP\ DQG GHnQH WKH WUXH FRUUHODWLRQ
PDWUL[ DW WLPH W DV VLPSO\
I XOO

+  >GLDJ+  GLDJ+   @  

b 
W

I XOO

I XOO

I XOO



 b

DQG WKH FRUUHODWLRQ PDWUL[ LPSOLHG E\ WKH IDFWRU PRGHO DV

A
b

9A >GLDJ9A GLDJ9A  @  



 b

ZKHUH 9A LV GHnQHG LQ HTXDWLRQ 

:H GHnQH WKUHH PHWULFV WR PHDVXUH WKH IRUHFDVWLELOLW\ RI HDFK IDFWRU PRGHO IRU IXWXUH
FRUUHODWLRQV
W

A u
u b  b b
u b  u
A Mu
u Mb  b b


&

&



u Mb  Mu
A Mb  b
A M  u
u b  b



&





ZKHUH u LV D  d  YHFWRU RI RQHV 7KH nUVW PHWULF &  VXPPDUL]HV WKH DFFXUDF\ RI
A IRU GHVFULELQJ b  WKH CWUXH
FRUUHODWLRQ PDWUL[ 7KLV PHDVXUH VLPSO\ VXPV DOO RI WKH
b
A DQG b   DQG VFDOHV LW E\ WKH
HOHPHQWV RI WKH HUURU PDWUL[ HJ WKH GLmHUHQFH EHWZHHQ b
VXP RI DOO HOHPHQWV RI WKH WUXH FRUUHODWLRQ PDWUL[ 7KHUHIRUH & PHDVXUHV WKH PRGHO
V
DELOLW\ WR FDSWXUH ERWK WKH GLUHFWLRQ DQG PDJQLWXGH RI WKH WUXH FRUUHODWLRQ PDWUL[ RXW RI
VDPSOH & LV LGHQWLFDO WR & H[FHSW WKDW WKH DEVROXWH YDOXH RI DOO HOHPHQWV RI ERWK WKH
HUURU PDWUL[ DQG WKH WUXH PDWUL[ DUH WDNHQ 7KHUHIRUH WKLV PHWULF PHDVXUHV ZKHWKHU WKH
PRGHO FDSWXUHV WKH PDJQLWXGH RI WKH FRUUHODWLRQV DPRQJ WKH  DVVHWV LJQRULQJ WKH VLJQ RI
WKRVH FRUUHODWLRQV )LQDOO\ & VLPSO\ PHDVXUHV ZKHWKHU WKH PRGHO FDQ FDSWXUH WKH GLUHFWLRQ
RI WKH FRUUHODWLRQV LJQRULQJ WKHLU PDJQLWXGHV ,I WKH PRGHOHVWLPDWHG FRUUHODWLRQ PDWUL[
FDSWXUHV WKH WUXH FRUUHODWLRQV DFFXUDWHO\ WKHQ ERWK & DQG & VKRXOG EH FORVH WR ]HUR DQG
& VKRXOG EH FORVH WR RQH
$V 3DQHO % RI 7DEOH ,, VKRZV WKH PDUNHW VHHPV WR FDSWXUH ERWK WKH PDJQLWXGH DQG
GLUHFWLRQ RI WKH WUXH FRUUHODWLRQ PDWUL[ ZHOO FRQVLVWHQW ZLWK LWV DELOLW\ WR IRUHFDVW IXWXUH
W



FRYDULDQFHV $JDLQ WKH PDUNHW IDFWRU VHHPV WR FDSWXUH FRUUHODWLRQV IDU EHWWHU WKDQ DQ\ RWKHU
VLQJOH IDFWRU 60% +0/ DQG 3 5< 5 DSSHDU WR SHUIRUP VLPLODUO\ EXW ,0 VHHPV WR EH
PXFK ZRUVH DW GHVFULELQJ IXWXUH FRUUHODWLRQV SHUIRUPLQJ ZRUVH WKDQ D UDQGRPO\ JHQHUDWHG
VHW RI IDFWRUV
7XUQLQJ WR WKH PXOWLIDFWRU PRGHOV WKH )DPD)UHQFK IRXU IDFWRU LQGXVWU\ PRPHQWXP
PRGHO DQG &DUKDUW  PRGHO DOO IRUHFDVW IXWXUH FRUUHODWLRQV TXLWH ZHOO DQG DUH VLJQLI
LFDQWO\ EHWWHU DW GRLQJ VR WKDQ D VHW RI UDQGRPO\ JHQHUDWHG IDFWRUV +RZHYHU WKH DGGHG
FRQWULEXWLRQ RI D PRPHQWXP IDFWRU HLWKHU 3 5< 5 RU ,0  VHHPV WR GHFUHDVH WKH H[SODQD
WRU\ SRZHU RI WKH PRGHO DV WKH )DPD DQG )UHQFK  IDFWRUV E\ WKHPVHOYHV SHUIRUP
EHWWHU WKDQ HLWKHU WKH &DUKDUW  RU LQGXVWU\ PRPHQWXP PRGHO RXW RI VDPSOH 7KLV
LQGLFDWHV WKDW D PRPHQWXP IDFWRU LV QRW XVHIXO LQ SUHGLFWLQJ IXWXUH FRUUHODWLRQV DQG LV
FRQVLVWHQW ZLWK SUHYLRXV UHVXOWV RQ IRUHFDVWLQJ FRYDULDQFHV +RZHYHU FRQWUDU\ WR WKH UHVXOWV
RQ FRYDULDQFHV WKH SULQFLSDO FRPSRQHQWV PRGHOV VHHP WR GHVFULEH IXWXUH FRUUHODWLRQV TXLWH
ZHOO DQG VLJQLnFDQWO\ EHWWHU WKDQ D VHW RI UDQGRPO\ JHQHUDWHG IDFWRUV 7KLV GLVFUHSDQF\
VXJJHVWV WKDW WKH SULQFLSDO FRPSRQHQWV PRGHOV IDLO WR DFFXUDWHO\ FDSWXUH WKH YDULDQFH RI WKH
 DVVHWV

&

,QGLYLGXDO 6WRFNV

2XU UHVXOWV RQ WKH FRQWULEXWLRQ RI WKH SURSRVHG IDFWRUV WR WKH FRYDULDQFH PDWUL[ RI DVVHW
UHWXUQV FULWLFDOO\ GHSHQGV RQ WKH DVVXPSWLRQ WKDW WKH  DVVHWV WKH  LQGXVWU\ SRUWIROLRV
VL[ VL]H DQG ERRNWRPDUNHW SRUWIROLRV PDUNHW LQGH[ DQG nYH SDVW \HDU UHWXUQ VRUWHG SRUW
IROLRV UHDVRQDEO\ UHSUHVHQW WKH GLVSHUVLRQ LQ HTXLW\ UHWXUQV LQ WKH HFRQRP\ )RU UREXVWQHVV
, FRQGXFW WKH VDPH WHVWV XVLQJ LQGLYLGXDO VWRFNV DV WKH EDVLV DVVHWV +RZHYHU VLQFH WKH
QXPEHU RI LQGLYLGXDO HTXLWLHV UDQJHV IURP DSSUR[LPDWHO\ WZR WKRXVDQG WR PRUH WKDQ VHYHQ
WKRXVDQG RYHU WKH VDPSOH SHULRG LW LV QR ORQJHU FRPSXWDWLRQDOO\ IHDVLEOH WR HPSOR\ D PXO
WLYDULDWH *$5&+ PRGHO WR HVWLPDWH FRQGLWLRQDO FRYDULDQFH PDWULFHV 5DWKHU , HVWLPDWH
IDFWRU ORDGLQJV IRU HDFK LQGLYLGXDO VHFXULW\ E\ UHJUHVVLQJ WKH SULRU  PRQWKV RI LWV UHWXUQV
IURP W b  WR W b  RQ WKH SDVW  PRQWKV RI IDFWRU UHDOL]DWLRQV 7KH FRHpFLHQWV IURP
WKLV UHJUHVVLRQ DUH HPSOR\HG DV DQ HVWLPDWH IRU WKH IDFWRU ORDGLQJV RI VWRFN L DW WLPH W nA 
5HSHDWLQJ WKLV SURFHVV IRU DOO 1 VWRFNV SURGXFHV DQ 1 d . ORDGLQJ PDWUL[ nAW ZLWK .
EHLQJ WKH QXPEHU RI IDFWRUV , WKHQ HVWLPDWH WKH FRYDULDQFH PDWUL[ LPSOLHG E\ WKH PRGHO
DV
A W nAW
9A
nAW h

LW

 6HFXULWLHV ZLWK OHVV WKDQ  PRQWKV RI SULRU DYDLODEOH UHWXUQ GDWD DUH H[FOXGHG



A LV WKH HVWLPDWHG VDPSOH FRYDULDQFH PDWUL[ RI WKH IDFWRUPLPLFNLQJ SRUWIROLRV RYHU

ZKHUH h
WKH SDVW  PRQWKV
%HFDXVH RI WKH ODUJH QXPEHU RI LQGLYLGXDO VWRFNV DQG WR HQVXUH QRQVLQJXODULW\ RI WKH
FRYDULDQFH PDWUL[ , VHOHFW  VWRFNV UDQGRPO\ DW WLPH W DQG FRPSXWH WKH FRYDULDQFH DQG
FRUUHODWLRQ PHWULFV DV EHIRUH IRU HDFK IDFWRU PRGHO , WKHQ UHVDPSOH DQRWKHU  LQGLYLGXDO
VHFXULWLHV ZLWK UHSODFHPHQW DQG UHFRPSXWH WKH PHWULFV UHSHDWLQJ WKLV SURFHVV  WLPHV
7KXV DW HDFK SRLQW LQ WLPH , FRPSXWH  VHWV RI GLVWDQFH PHWULFV IRU HDFK IDFWRU PRGHO
XVLQJ  VHWV RI  UDQGRPO\ VHOHFWHG VHFXULWLHV DW WLPH W +HUH , GHnQH WKH CWUXH
FRYDULDQFH
PDWUL[ DW WLPH W DV VLPSO\ WKH VDPSOH FRYDULDQFH PDWUL[ RYHU WKH SDVW  PRQWKV SOXV WKH
SURGXFW PRPHQW PDWUL[ 5 5 
7KH DYHUDJH YDOXHV RI WKH FRYDULDQFH DQG FRUUHODWLRQ PHWULFV DFURVV WKH  VLPXODWLRQV
DUH FDOFXODWHG DW HDFK SRLQW LQ WLPH DYHUDJHG RYHU WLPH DQG UHSRUWHG LQ 7DEOH ,,, $V WKH
WDEOH VKRZV KRZHYHU HYHQ WKRXJK WKH PRPHQWXP YDULDEOHV DSSHDU WR SHUIRUP ZRUVH WKDQ
WKH RWKHU YDULDEOHV FRQVLVWHQW ZLWK SUHYLRXV HYLGHQFH WKH QRLVH LQ LQGLYLGXDO VWRFN UHWXUQV
VHHPV WR VZDPS WKH DELOLW\ RI WKH IDFWRUV WR GHVFULEH FRPPRQ YDULDWLRQ (YHQ VR WKH )DPD
DQG )UHQFK  IDFWRUV VWLOO DSSHDU WR FDSWXUH  WR  RI WKH YDULDWLRQ LQ LQGLYLGXDO VWRFN
UHWXUQV DQG ERWK WKH PDUNHW DQG 60 % FDSWXUH DERXW  WR  E\ WKHPVHOYHV DOO VWDWLV
WLFDOO\ VLJQLnFDQW 7KH SHUIRUPDQFH RI WKH FRQGLWLRQDO SULQFLSDO FRPSRQHQWV PRGHO ZKLFK
VHHPV WR FDSWXUH  WR  RI LQGLYLGXDO VWRFN UHWXUQ FRYDULDWLRQ LV PLVOHDGLQJ EHFDXVH
RI WKH KXJH VWDQGDUG HUURUV WKLV PRGHO JHQHUDWHV :KLOH WKH PDJQLWXGHV DUH LPSUHVVLYH
WKH VWDQGDUG HUURUV IDLO WR UHMHFW WKH QXOO K\SRWKHVLV WKDW WKLV PRGHO GRHV QRW FDSWXUH DQ\
YDULDWLRQ DPRQJ LQGLYLGXDO VHFXULW\ UHWXUQV ([DPLQLQJ WKH FRUUHODWLRQ PHWULFV LW LV HTXDOO\
GLpFXOW WR GHWHFW SUHGLFWDELOLW\ DPRQJ WKH IDFWRUV GXH WR QRLVH LQ LQGLYLGXDO UHWXUQ GDWD
EXW WKH )DPD DQG )UHQFK  IDFWRUV VWLOO VHHP WR H[KLELW D VOLJKW DGYDQWDJH RYHU WKH
RWKHU IDFWRUV DQG LQ SDUWLFXODU WKH PRPHQWXP YDULDEOHV
:H FRQFOXGH KRZHYHU WKDW LW PD\ EH WRR GLpFXOW WR DFFXUDWHO\ H[DPLQH LQGLYLGXDO VWRFN
UHWXUQV DW D PRQWKO\ IUHTXHQF\ VLQFH LQGLYLGXDO PRQWKO\ UHWXUQ YDULDWLRQ LV OLNHO\ GRPLQDWHG
E\ LGLRV\QFUDWLF VKRFNV PDNLQJ FRPPRQ FRPSRQHQWV LQ UHWXUQV GLpFXOW WR LGHQWLI\
W

'

0LQLPXP 5HVLGXDO 9DULDQFH 3RUWIROLRV

$V DQ DGGLWLRQDO WHVW RI WKH IDFWRUV

DELOLW\ WR FDSWXUH FRYDULDWLRQ DPRQJ DVVHWV UDWKHU WKDQ
H[DPLQLQJ WKH V\VWHPDWLF SRUWLRQ RI WKH FRYDULDQFH PDWUL[ LPSOLHG E\ HDFK IDFWRU PRGHO
, H[DPLQH WKH UHVLGXDO FRYDULDQFH PDWUL[ XQGHU HDFK PRGHO 6SHFLnFDOO\ , H[DPLQH KRZ
PXFK YRODWLOLW\ UHPDLQV DIWHU DFFRXQWLQJ IRU D SDUWLFXODU VHW RI IDFWRUV 8VLQJ HTXDWLRQ 
, FRPSXWH WKH UHVLGXDO FRYDULDQFH PDWUL[ l  XQGHU HDFK IDFWRU PRGHO DW D SRLQW LQ WLPH
W



DQG IRUP PLQLPXP YDULDQFH SRUWIROLR ZHLJKWV IURP l  7KHVH PLQLPXP UHVLGXDO YDULDQFH
SRUWIROLR ZHLJKWV DUH WKHQ DSSOLHG WR WKH UHVLGXDO UHWXUQV RI WKH PRGHO 6SHFLnFDOO\ WKH
UHVLGXDO UHWXUQ RQ WKH PLQLPXP UHVLGXDO YDULDQFH SRUWIROLR LV GHnQHG DV
W

(a

l u a
>5 b nA )a @
u l u
b



a LV WKH YHFWRU RI DVVHW UHWXUQV nA LV WKH  d .

ZKHUH u LV D  d  YHFWRU RI RQHV 5
PDWUL[ RI IDFWRU ORDGLQJV HVWLPDWHG IURP WKH FRQGLWLRQDO FRYDULDQFH PDWUL[ +  DQG )a LV
WKH . d  YHFWRU RI IDFWRU UHDOL]DWLRQV DW WLPH W $JDLQ WKLV LV DQ RXW RI VDPSOH WHVW VLQFH
ERWK l DQG nA DUH IRUHFDVWV EDVHG RQ REVHUYDWLRQV WKURXJK WLPH W b  ,I WKH IDFWRU PRGHO
FDSWXUHV D VXEVWDQWLDO SRUWLRQ RI WKH FRYDULDQFH PDWUL[ RI DVVHW UHWXUQV WKHQ WKH UHVLGXDO
UHWXUQ RI WKH PLQLPXP UHVLGXDO YDULDQFH SRUWIROLR LPSOLHG E\ WKH PRGHO (a  VKRXOG EH ]HUR
+HQFH WKH WLPHVHULHV PHDQ DQG VWDQGDUG GHYLDWLRQ RI (a VKRXOG EH FORVH WR ]HUR LI WKH
IDFWRU PRGHO FDSWXUHV D VLJQLnFDQW IUDFWLRQ RI FRYDULDQFH ULVN
:H FRPSXWH WKHVH PLQLPXP UHVLGXDO YDULDQFH SRUWIROLR UHVLGXDO UHWXUQV XQGHU HDFK IDFWRU
PRGHO DQG LQGLYLGXDO IDFWRUPLPLFNLQJ SRUWIROLR 7DEOH ,9 UHSRUWV WKHLU VXPV RI VTXDUHV
DV ZHOO DV WKHLU GHPHDQHG VXP RI VTXDUHV RYHU WLPH DV PHDVXUHV RI GLVSHUVLRQ $V WKH
WDEOH GHPRQVWUDWHV WKH SULQFLSDO FRPSRQHQWV PRGHOV VHHP WR FDSWXUH WKH PRVW YDULDWLRQ
SURGXFLQJ OLWWOH YDULDWLRQ LQ (a RYHU WLPH ,Q DGGLWLRQ WKH PDUNHW IDFWRU FDSWXUHV D JUHDWHU
IUDFWLRQ RI WKH RXW RI VDPSOH FRYDULDQFH PDWUL[ WKDQ DQ\ RWKHU VLQJOH IDFWRU FRQVLVWHQW ZLWK
HDUOLHU UHVXOWV $PRQJ WKH RWKHU IDFWRUV 60 % DSSHDUV WR FDSWXUH PRUH FRYDULDQFH ULVN WKDQ
+0/ ZKLFK DSSHDUV WR SHUIRUP EHWWHU WKDQ HLWKHU RI WKH PRPHQWXP YDULDEOHV /LNHZLVH
WKH )DPD DQG )UHQFK  IDFWRUV FDSWXUH PRUH RXW RI VDPSOH FRYDULDWLRQ E\ WKHPVHOYHV
WKDQ ZKHQ WKH PRPHQWXP IDFWRUV DUH DGGHG WR WKHP
)RU UREXVWQHVV , DOVR FRPSXWH SRUWIROLR ZHLJKWV XVLQJ RQO\ WKH GLDJRQDO HOHPHQWV RI l
HJ ZHLJKW E\ WKH LQYHUVH RI WKH HVWLPDWHG YDULDQFH DQG HTXDOZHLJKW WKH UHVLGXDO UHWXUQV
)RU WKH YDULDQFHRQO\ SRUWIROLR ZHLJKWV WKH SUHYLRXV UHVXOWV DUH FRQnUPHG 7KH SULQFLSDO
FRPSRQHQWV PRGHOV DQG WKH PDUNHW FDSWXUH WKH PRVW VLJQLnFDQW DPRXQW RI YDULDWLRQ WKH
PRPHQWXP YDULDEOHV FDSWXUH WKH OHDVW DQG WKH )DPD DQG )UHQFK  PRGHO GRHV TXLWH
ZHOO SHUIRUPLQJ EHWWHU ZLWKRXW WKH PRPHQWXP IDFWRUV :LWK HTXDO SRUWIROLR ZHLJKWV WKH
PDUNHW LV OHVV VXFFHVVIXO EXW WKH SULQFLSDO FRPSRQHQWV PRGHOV VWLOO SHUIRUP ZHOO 7KH )DPD
DQG )UHQFK  PRGHO DOVR VHHPV WR SHUIRUP TXLWH ZHOO VXJJHVWLQJ WKDW 60% DQG +0 /
SLFN XS VLJQLnFDQW YDULDWLRQ PLVVHG E\ WKH PDUNHW IDFWRU ZKHQ , HTXDO ZHLJKW WKH UHVLGXDO
UHWXUQV
)LQDOO\ 3DQHO % RI 7DEOH ,9 UHSRUWV WKH PHDQV DQG WVWDWLVWLFV RI WKHVH UHVLGXDO SRUW
IROLRV $V VKRZQ LQ WKH WDEOH DOO RI WKH PXOWLIDFWRU PRGHOV VHHP WR FDSWXUH PRVW RI WKH
W



YDULDWLRQ LQ DVVHW UHWXUQV DV WKH UHVLGXDO UHWXUQV RQ WKH PLQLPXP UHVLGXDO YDULDQFH SRUWIR
OLRV DUH VWDWLVWLFDOO\ LQGLVWLQJXLVKDEOH IURP ]HUR SDUWLFXODUO\ IRU WKH SULQFLSDO FRPSRQHQWV
PRGHOV ZKLFK VHHP WR HOLPLQDWH PRVW RI WKH UHVLGXDO UHWXUQV DQG YDULDWLRQ 7KH PDUNHW
DOVR DSSHDUV WR FDSWXUH VXEVWDQWLDO YDULDWLRQ DFURVV DVVHWV DV WKH PLQLPXP UHVLGXDO YDUL
DQFH SRUWIROLR SURGXFHV ]HUR DYHUDJH UHVLGXDO SURnWV %RWK 60 % DQG +0/ DOVR FRQWULEXWH
VLJQLnFDQWO\ WR FRYDULDQFH ULVN OHDYLQJ YHU\ VPDOO UHVLGXDO UHWXUQV ZKLOH WKH PRPHQWXP
SRUWIROLRV FRQWULEXWH WKH OHDVW DV WKH SRUWIROLRV SURGXFH VLJQLnFDQW SURnWV LQGLFDWLQJ WKDW
WKHLU FRQWULEXWLRQ WR WRWDO YRODWLOLW\ LV VPDOO

,9

2SWLPDO 7UDGLQJ 6WUDWHJLHV DQG &KDUDFWHULVWLFV

YHUVXV &RYDULDQFHV

,Q WKLV VHFWLRQ , DQDO\]H WKH YRODWLOLWLHV RI VWUDWHJLHV GHULYHG IURP WKH DQRPDOLHV IURP D
SUDFWLFDO SHUVSHFWLYH , DLP WR GHWHUPLQH KRZ YRODWLOH VWUDWHJLHV GHVLJQHG WR H[SORLW WKHVH
DQRPDOLHV DUH ,I WKH DQRPDORXV UHWXUQV DVVRFLDWHG ZLWK nUP FKDUDFWHULVWLFV DUH GULYHQ E\
V\VWHPDWLF YDULDWLRQ WKHQ ZH VKRXOG QRW EH DEOH WR FUHDWH SURnWDEOH VWUDWHJLHV IURP WKHVH
FKDUDFWHULVWLFV ZLWKRXW LQFXUULQJ VXEVWDQWLDO YDULDELOLW\ )XUWKHUPRUH ZKHQ , KHGJH RXW
H[SRVXUH WR RWKHU SRWHQWLDO IDFWRUV WKHVH VWUDWHJLHV VKRXOG UHPDLQ YRODWLOH LI WKH DQRPDOLHV
DUH WLHG WR V\VWHPDWLF YDULDWLRQ
, GHVLJQ VWUDWHJLHV WKDW LVRODWH H[SRVXUH WR RQH DQRPDO\ DQG DWWHPSW WR PD[LPL]H SURnW
DQG PLQLPL]H YDULDQFH ,I WKH UHVXOWLQJ VWUDWHJLHV DUH KLJKO\ YRODWLOH WKHQ ZH FRQFOXGH WKDW
WKH DQRPDO\ PD\ EH FRUUHODWHG ZLWK D VRXUFH RI QRQGLYHUVLnDEOH V\VWHPDWLF YDULDWLRQ
0RUHRYHU LI WKH 6KDUSH UDWLR RI WKH VWUDWHJ\ LV YHU\ KLJK WKHQ SHUKDSV WKH DQRPDORXV
UHWXUQV DUH GULYHQ E\ VRXUFHV RWKHU WKDQ ULVN 0DF.LQOD\  DUJXHV WKDW D UHDVRQDEOH
ERXQG RQ WKH PD[LPXP PRQWKO\ 6KDUSH UDWLR LQ WKH HFRQRP\ LV  7KLV DQDO\VLV DOVR
LGHQWLnHV WUDGLQJ VWUDWHJLHV WKDW RSWLPDOO\ H[SORLW WKH DQRPDOLHV SURYLGLQJ D SUHVFULSWLRQ
IRU HpFLHQW LQYHVWPHQW
, FUHDWH SRUWIROLRV WKDW PLQLPL]H YDULDELOLW\ VXEMHFW WR KDYLQJ ODUJH H[SRVXUH WR HDFK
RI VL]H ERRNWRPDUNHW DQG PRPHQWXP )RU HDVH RI SUHVHQWDWLRQ , ZLOO LOOXVWUDWH WKH
VWUDWHJLHV IRU VL]H EXW DOVR FRQGXFW WKH VDPH DQDO\VLV IRU ERRNWRPDUNHW DQG PRPHQWXP
7KH nUVW VWUDWHJ\ DWWHPSWV WR FRQWURO IRU FRPPRQ VRXUFHV RI YDULDWLRQ 6WUDWHJ\  PLQL
PL]HV YDULDQFH VXEMHFW WR KDYLQJ DQ DYHUDJH VL]H WKDW LV RQH VWDQGDUG GHYLDWLRQ EHORZ WKH
FURVVVHFWLRQDO DYHUDJH VL]H RI WKH  DVVHWV DQG KDYLQJ QR H[SRVXUH WR WKH ZLWKLQ VDPSOH
FRQGLWLRQDO SULQFLSDO FRPSRQHQWV IDFWRUV $JDLQ , HPSOR\ WKH *$5&+HVWLPDWHG FRYDUL
DQFH PDWUL[ +  WR DFFRXQW IRU WLPHYDULDWLRQ LQ ULVN DQG FRUUHODWLRQV DPRQJ WKH VWUDWHJLHV
W



DQG DVVHWV

PLQ Z + Z

 Z



VW Z VL]H 

x b} 


Wb

Zn


3&

Wb

Wb




ZKHUH Z LV D d YHFWRU RI SRUWIROLR ZHLJKWV VL]H  LV WKH YHFWRU RI VL]H FKDUDFWHULVWLFV LQ
WKH SUHYLRXV SHULRG DQG x  DQG }  DUH WKH FURVVVHFWLRQDO PHDQ DQG VWDQGDUG GHYLDWLRQ
RI VL]H FKDUDFWHULVWLFV DW WLPH W b  DQG n
LV WKH  d  YHFWRU RI FRQGLWLRQDO SULQFLSDO
FRPSRQHQW IDFWRU ORDGLQJV HVWLPDWHG IURP WKH *$5&+ FRYDULDQFH PDWUL[ +  FRPSXWHG
ZLWKLQ VDPSOH WR DFFRXQW IRU WKH PD[LPXP DPRXQW RI YDULDWLRQ
7KLV VWUDWHJ\ DWWHPSWV WR KHGJH RXW H[SRVXUH WR WKH SULQFLSDO FRPSRQHQWV IDFWRUV ZKLFK
SUR[\ IRU WKH WUXH V\VWHPDWLF ULVN IDFWRUV ZKLOH UHWDLQLQJ H[SRVXUH WR VPDOO DVVHWV ,I WKH
VL]H DQRPDO\ LV UHODWHG WR D V\VWHPDWLF ULVN FRPSRQHQW DQG WKH SULQFLSDO FRPSRQHQWV IDFWRUV
UHDVRQDEO\ UHSUHVHQW FRPPRQ VRXUFHV RI YDULDWLRQ WKHQ LW ZLOO EH GLpFXOW WR WLOW WRZDUG
VPDOO DVVHWV ZLWKRXW EHFRPLQJ H[SRVHG WR RQH RU PRUH RI WKH SULQFLSDO FRPSRQHQWV IDFWRUV
&RQVHTXHQWO\ LI ]HUR IDFWRU H[SRVXUH LV PDLQWDLQHG WKH VWUDWHJ\ ZLOO QRW EH WLOWHG WRZDUG
VPDOOHU DVVHWV DQG VKRXOG QRW \LHOG UHWXUQV VLJQLnFDQWO\ GLmHUHQW IURP ]HUR
7KH ZHLJKWV RI WKH VWUDWHJ\ DUH GHWHUPLQHG XVLQJ LQIRUPDWLRQ DW WLPH W b  DQG DSSOLHG
RXW RI VDPSOH WR WLPH W H[FHVV UHWXUQV 7KHVH ZHLJKWV DUH GHWHUPLQHG HYHU\ PRQWK DQG 7DEOH
9 UHSRUWV WKH DYHUDJH PRQWKO\ UHWXUQV RI WKLV VWUDWHJ\ SHU GROODU LQYHVWHG RYHU WLPH DORQJ
ZLWK D WVWDWLVWLF WKDW WKHVH UHWXUQV DUH VLJQLnFDQWO\ GLmHUHQW IURP ]HUR 7KLV VWUDWHJ\
SURGXFHV PHDQ UHWXUQV RI RQO\  SHU PRQWK ZKLFK LV QRW VLJQLnFDQWO\ GLmHUHQW IURP
]HUR WVWDWLVWLF RI  DQG LPSOLHV DQ XQFRQGLWLRQDO 6KDUSH PHDVXUH RI  ZKLFK LV
DSSUR[LPDWHO\ WKH VDPH DV WKH XQFRQGLWLRQDO 6KDUSH PHDVXUH RI WKH PDUNHW LQGH[ 
)XUWKHUPRUH , FRPSXWH WKH FRQGLWLRQDO 6KDUSH PHDVXUH RI WKLV VWUDWHJ\ DV
W

Wb

Wb

Wb

3&

6KDUSH

Z 5 Z + Z   




ZKHUH Z LV FRPSXWHG IURP WKH DERYH RSWLPL]DWLRQ SUREOHP 7KH WLPHVHULHV DYHUDJH RI WKH
FRQGLWLRQDO 6KDUSH PHDVXUH LV  VPDOOHU WKDQ WKH XQFRQGLWLRQDO 6KDUSH PHDVXUH RI WKH
VWUDWHJ\ DQG VPDOOHU WKDQ WKH 6KDUSH PHDVXUH IRU WKH PDUNHW LQGH[ 7KXV FRQWUROOLQJ IRU
H[SRVXUH WR WKH SULQFLSDO FRPSRQHQWV IDFWRUV DQG WLOWLQJ WRZDUG DZD\ IURP VPDOO ODUJH
VWRFNV GRHV QRW VHHP WR SURGXFH VLJQLnFDQWO\ JUHDWHU SURnWV RU UHGXFH RYHUDOO YRODWLOLW\ VXJ
JHVWLQJ WKDW LQFUHDVLQJ H[SRVXUH WR WKH VL]H DQRPDO\ UHVXOWV LQ DGGHG H[SRVXUH WR V\VWHPDWLF
VRXUFHV RI YDULDWLRQ
 :H DGG WKH FRQVWUDLQW WKDW WKH ZHLJKWV LQ WKH VWUDWHJ\ VXP WR ]HUR ZLWK D GROODU LQYHVWHG ORQJ DQG D
W

GROODU VKRUW



,Q DGGLWLRQ WKH DYHUDJH PLQLPXP ZHLJKW RQ DQ\ RI WKH  DVVHWV XQGHU WKLV VWUDWHJ\ LV
 DQG WKH DYHUDJH PD[LPXP ZHLJKW LV  7KHUHIRUH WKH VWUDWHJ\ GRHV QRW H[KLELW
H[WUHPH ZHLJKWV DQG LV QRW KHDYLO\ ZHLJKWHG RQ SDUWLFXODU DVVHWV )LQDOO\ 7DEOH 9 UHSRUWV
WKH DYHUDJH VL]H ERRNWRPDUNHW DQG PRPHQWXP SDVW UHWXUQ UDQNV RI WKH VWUDWHJ\ 7KDW
LV , UDQN HDFK RI WKH  DVVHWV DW WLPH W EDVHG RQ WKHLU WLPH W b  VL]H ERRNWRPDUNHW DQG
SDVW PRQWK UHWXUQV DQG FDOFXODWH WKH SRUWIROLR
V DYHUDJH UDQN RQ HDFK RI WKHVH DWWULEXWHV
DW WLPH W 7KHVH SRUWIROLR DYHUDJH UDQNV DUH WKHQ DYHUDJHG RYHU WLPH DQG UHSRUWHG LQ WKH
WDEOH )RU LQVWDQFH VWUDWHJ\  KDV DQ DYHUDJH VL]H UDQNLQJ RI  LQGLFDWLQJ WKDW WKH
ORQJ SRVLWLRQV LQ WKH VWUDWHJ\ DUH RQ DYHUDJH  VL]H UDQNV EHORZ WKH VKRUW SRVLWLRQV ,Q
RWKHU ZRUGV WKLV VWUDWHJ\ LV LQ IDFW VOLJKWO\ WLOWHG WRZDUG VPDOOHU DVVHWV +RZHYHU EHFDXVH ,
IRUFH WKH VWUDWHJ\ WR KDYH ]HUR H[SRVXUH WR WKH SULQFLSDO FRPSRQHQWV IDFWRUV LI VL]H LV UHODWHG
WR WKHVH IDFWRUV WKHQ ZH OLPLW WKH VWUDWHJ\
V DELOLW\ WR ORDG RQ VL]H 7KH ERRNWRPDUNHW
DQG PRPHQWXP UDQNV RI WKH VWUDWHJ\ DUH  DQG  UHVSHFWLYHO\ VXJJHVWLQJ WKDW WKH
VWUDWHJ\ LV VOLJKWO\ WLOWHG WRZDUG KLJKHU ERRNWRPDUNHW DVVHWV EXW YLUWXDOO\ XQH[SRVHG WR
PRPHQWXP
:H UHSHDW WKH VWUDWHJ\  RSWLPL]DWLRQ SUREOHP IRU ERRNWRPDUNHW DQG PRPHQWXP
ZKHUH , FRPSXWH SRUWIROLR ZHLJKWV WKDW PLQLPL]H YDULDQFH VXEMHFW WR KDYLQJ QR V\VWHPDWLF
ULVN H[SRVXUH LH WKH SULQFLSDO FRPSRQHQWV IDFWRUV DQG KDYLQJ DQ H[SRVXUH WR ERRNWR
PDUNHW PRPHQWXP RQH VWDQGDUG GHYLDWLRQ DERYH WKH FURVVVHFWLRQDO PHDQ DW W b  7KDW
LV , UHSODFH HTXDWLRQ  ZLWK Z %( 0 (  x   }  IRU ERRNWRPDUNHW DQG ZLWK
   x  } IRU PRPHQWXP ZKHUH x DQG } DUH WKH FURVVVHFWLRQDO PHDQ
Z5 




DQG VWDQGDUG GHYLDWLRQ RI ERRNWRPDUNHW HTXLW\ RI WKH  DVVHWV DW WLPH W b  DQG x  DQG
}  DUH WKH FURVVVHFWLRQDO PHDQ DQG VWDQGDUG GHYLDWLRQ RI WKH PRPHQWXP FKDUDFWHULVWLF
WKH FXPXODWLYH UHWXUQ RQ HDFK DVVHW IURP W b  WR W b  DW WLPH W b  UHVSHFWLYHO\
$V 7DEOH 9 LQGLFDWHV WLOWLQJ WRZDUG ERWK ERRNWRPDUNHW DQG PRPHQWXP LPSURYHV
WKH 6KDUSH UDWLR RI WKH LQYHVWPHQW VLJQLnFDQWO\ HYHQ ZKHQ , FRQWURO IRU V\VWHPDWLF ULVN
H[SRVXUH 7KH ERRNWRPDUNHW VWUDWHJ\ SURGXFHV PHDQ SURnWV RI  EDVLV SRLQWV SHU PRQWK
WVWDWLVWLF  ZLWK DQ XQFRQGLWLRQDO 6KDUSH UDWLR RI  DQG DQ DYHUDJH FRQGLWLRQDO
6KDUSH PHDVXUH RI  ZKLOH WKH PRPHQWXP VWUDWHJ\ SURGXFHV DQ DYHUDJH  EDVLV SRLQWV
SHU PRQWK ZLWK DQ XQFRQGLWLRQDO 6KDUSH UDWLR RI  DQG D FRQGLWLRQDO 6KDUSH PHDVXUH RI
 7KXV ERWK ERRNWRPDUNHW DQG PRPHQWXP RmHU SURnWDEOH LQYHVWPHQW RSSRUWXQLWLHV
 2QH UHDVRQ , GR QRW REWDLQ H[WUHPH SRUWIROLR ZHLJKWV LV EHFDXVH , OLPLW WKH H[SRVXUH WR VL]H WR EH RQH


Wb

Wb

Wb

Wb

Wb

Wb

Wb

Wb

Wb

Wb

VWDQGDUG GHYLDWLRQ DZD\ IURP WKH FURVVVHFWLRQDO PHDQ :KHQ , DOORZ WKH H[SRVXUH WR EH WZR VWDQGDUG
GHYLDWLRQV DZD\ IURP WKH PHDQ , REWDLQ PRUH H[WUHPH ZHLJKWV RQ FHUWDLQ DVVHWV ZKLFK PD\ QRW EH SUDFWL
FDOO\ IHDVLEOH ,GHDOO\ , ZRXOG OLNH WR PD[LPL]H H[SRVXUH WR VL]H LH FUHDWH WKH VWUDWHJ\ ZLWK WKH VPDOOHVW
DYHUDJH VL]H EXW WKLV ZRXOG FUHDWH HYHQ PRUH H[WUHPH SRUWIROLR ZHLJKWV +HQFH , HPSOR\ D RQH VWDQGDUG
GHYLDWLRQ H[SRVXUH LQ DOO RI WKH WHVWV



HYHQ DIWHU , DFFRXQW IRU WKH SULQFLSDO FRPSRQHQWV IDFWRUV 0RUHRYHU ERWK WKH ERRNWR
PDUNHW DQG PRPHQWXP VWUDWHJLHV DUH WLOWHG PRUH VWURQJO\ WRZDUG KLJK ERRNWRPDUNHW
nUPV DQG KLJK PRPHQWXP nUPV UHVSHFWLYHO\ WKDQ ZDV WUXH IRU WKH VL]H VWUDWHJ\ 7KLV
VXJJHVWV WKDW ZKLOH LW LV GLpFXOW WR WUDGH RQ VL]H ZLWKRXW EHLQJ H[SRVHG WR WKH ZLWKLQ VDPSOH
SULQFLSDO FRPSRQHQWV IDFWRUV RSWLPDOO\ WUDGLQJ RQ ERWK ERRNWRPDUNHW DQG PRPHQWXP FDQ
EH DFFRPSOLVKHG ZLWK OLWWOH H[SRVXUH WR WKHVH IDFWRUV VXJJHVWLQJ D ZHDNHU UHODWLRQ EHWZHHQ
WKHVH FKDUDFWHULVWLFV DQG WKHVH SUR[LHV IRU V\VWHPDWLF YDULDWLRQ

$

&KDUDFWHULVWLFV YHUVXV &RYDULDQFHV

$V DQ DGGLWLRQDO WHVW RI WKH UHODWLRQ EHWZHHQ WKHVH DQRPDOLHV DQG ULVN DQG WR WHVW ZKHWKHU
FKDUDFWHULVWLFV RU FRYDULDQFHV KDYH VWURQJHU H[SODQDWRU\ SRZHU IRU DYHUDJH UHWXUQV , VXEVWL
WXWH WKH IDFWRU ORDGLQJ RI WKH DVVHWV RQ WKH VL]H ERRNWRPDUNHW DQG PRPHQWXP IDFWRUV LQ
SODFH RI WKHLU FKDUDFWHULVWLFV )RU H[DPSOH WKH VHFRQG WUDGLQJ VWUDWHJ\ LV

PLQ Z + Z

 Z



VW Z n

60 %

Zn


3&

x V }
n




ZKHUH n
LV WKH YHFWRU RI 60% ORDGLQJV HVWLPDWHG IURP WKH SUHYLRXV SHULRG DQG x V
DQG } V DUH WKH FURVVVHFWLRQDO PHDQ DQG VWDQGDUG GHYLDWLRQ RI WKH ORDGLQJV RQ WKH VL]H
IDFWRU 60%
$V 7DEOH 9 LQGLFDWHV WKH UHVXOWV XVLQJ WKH IDFWRU ORDGLQJV DUH HYHQ ZHDNHU IRU VL]H DV WKH
VWUDWHJ\ DFWXDOO\ ORDGV VOLJKWO\ QHJDWLYHO\ RQ VL]H DQG GRHV QRW SURGXFH VLJQLnFDQW SURnWV
 EDVLV SRLQWV SHU PRQWK 7KXV KHGJLQJ RXW WKH SULQFLSDO FRPSRQHQWV IDFWRUV HVVHQWLDOO\
SUHYHQWV XV IURP ORDGLQJ SRVLWLYHO\ RQ 60 % DQG GRHV QRW SURGXFH D SURnWDEOH WUDGLQJ
VWUDWHJ\
5HSODFLQJ HTXDWLRQ  ZLWK WKH ORDGLQJV RQ +0 / DQG ,0 , DOVR nQG WKDW WKH
LPSURYHPHQW LQ WKH WUDGLQJ VWUDWHJ\ LV PLQLPDO DV ERWK SURGXFH QHJOLJLEOH SURnWV DQG DUH
QRW ZHOO H[SRVHG WR ERRNWRPDUNHW RU PRPHQWXP UHVSHFWLYHO\ &RPELQLQJ WKLV HYLGHQFH
ZLWK WKH UHVXOWV IURP WKH nUVW VWUDWHJ\ WKHVH nQGLQJV LQGLFDWH WKDW WKH FKDUDFWHULVWLFV RI
ERRNWRPDUNHW DQG PRPHQWXP SURYLGH VXEVWDQWLDO SURnW RSSRUWXQLWLWHV QRW FDSWXUHG E\
FRYDULDWLRQ ZLWK ERRNWRPDUNHW RU PRPHQWXP IDFWRUV
7R IXUWKHU WHVW ZKHWKHU FKDUDFWHULVWLFV RU FRYDULDQFHV EHWWHU GHVFULEH DYHUDJH UHWXUQV ,
FRPSXWH D WKLUG VWUDWHJ\ E\ DGGLQJ WKH FRQVWUDLQW WR VWUDWHJ\  WKDW WKH ORDGLQJ RQ WKH VL]H
60 %

 :H DOVR FRQGXFWHG WHVWV XVLQJ ORDGLQJV RQ 3 5< 5 ZLWK VLPLODU UHVXOWV EXW UHSRUW ,0 IDFWRU ORDGLQJV

RQO\ IRU EUHYLW\ DQG EHFDXVH  RI WKH  DVVHWV H[DPLQHG DUH LQGXVWU\ SRUWIROLRV



IDFWRU 60% EH ]HUR /LNHZLVH IRU ERRNWRPDUNHW DQG PRPHQWXP , DGG WKH FRQVWUDLQWV
WKDW Z n
 DQG Z n
 UHVSHFWLYHO\ 6WUDWHJ\  WKHUHIRUH DWWHPSWV WR LQYHVW
LQ VPDOO DVVHWV ZKLOH KDYLQJ QR H[SRVXUH WR WKH SULQFLSDO FRPSRQHQWV DQG QR H[SRVXUH WR
60 % WKH IDFWRU GHULYHG IURP WKH VL]H FKDUDFWHULVWLF 6LPLODUO\ IRU ERRNWRPDUNHW DQG
PRPHQWXP VWUDWHJ\  DWWHPSWV WR KDYH D KLJK FKDUDFWHULVWLF H[SRVXUH ZLWK QR SULQFLSDO
FRPSRQHQWV IDFWRUV RU +0 / RU ,0 H[SRVXUH UHVSHFWLYHO\ &RQYHUVHO\ WKH IRXUWK VWUDWHJ\
DWWHPSWV WR PD[LPL]H H[SRVXUH WR WKH VL]H RU ERRNWRPDUNHW RU PRPHQWXP IDFWRU EXW
FRQVWUDLQV H[SRVXUH WR WKH VL]H RU ERRNWRPDUNHW RU PRPHQWXP FKDUDFWHULVWLF WR EH ]HUR
ZKLOH KDYLQJ QR H[SRVXUH WR WKH SULQFLSDO FRPSRQHQWV IDFWRUV (YDOXDWLQJ WKH SUHGLFWLYH
DELOLW\ RI FKDUDFWHULVWLFV YHUVXV FRYDULDQFHV LQ WKLV PDQQHU DYRLGV WKH SUREOHPV QRWHG LQ
%HUN  ZLWK XVLQJ VRUWLQJ SURFHGXUHV WR SURGXFH SRUWIROLRV DV LQ 'DQLHO DQG 7LWPDQ

7DEOH 9 VKRZV WKDW QHLWKHU RI WKHVH VWUDWHJLHV SURGXFH VLJQLnFDQW SURnWV IRU VL]H LQ
GLFDWLQJ WKDW HLWKHU WKH SULQFLSDO FRPSRQHQWV VSDQ WKH VL]H HmHFW RU WKDW ERWK WKH VL]H
FKDUDFWHULVWLF DQG FRYDULDQFH ZLWK 60 % DUH HTXDOO\ LQIRUPDWLYH DERXW UHWXUQV +RZHYHU
WKH DYHUDJH VL]H UDQN RI VWUDWHJ\  LV  LQGLFDWLQJ D VOLJKW WLOW WRZDUG VPDOO VWRFNV
ZKLOH WKH DYHUDJH VL]H UDQN RI VWUDWHJ\  LV  VXJJHVWLQJ WKDW WKH VL]H FKDUDFWHULVWLF PD\
EH VRPHZKDW PRUH LQIRUPDWLYH )RU ERRNWRPDUNHW DQG PRPHQWXP KRZHYHU , REWDLQ YHU\
GLmHUHQW UHVXOWV IRU WKH LPSRUWDQFH RI FKDUDFWHULVWLFV YHUVXV IDFWRU ORDGLQJV LQ GHVFULELQJ UH
WXUQV 6WUDWHJ\  ZKLFK LV H[SRVHG WR WKH FKDUDFWHULVWLF EXW QRW WKH IDFWRU SURGXFHV
VLJQLnFDQWO\ ODUJH SURnWV RI  EDVLV SRLQWV WVWDWLVWLF  IRU ERRNWRPDUNHW ZLWK D
ODUJH XQFRQGLWLRQDO PRQWKO\ 6KDUSH UDWLR RI  DQG D FRQGLWLRQDO DYHUDJH 6KDUSH PHD
VXUH RI  LQGLFDWLQJ WKDW WKH H[SODQDWRU\ SRZHU RI WKH ERRNWRPDUNHW FKDUDFWHULVWLF IRU
GHVULELQJ WKH FURVVVHFWLRQ RI H[SHFWHG UHWXUQV LV QRW FDSWXUHG E\ WKH ERRNWRPDUNHW IDFWRU
+0/ QRU WKH SULQFLSDO FRPSRQHQWV IDFWRUV 2Q WKH RWKHU KDQG VWUDWHJ\  ZKLFK LV H[
SRVHG WR WKH IDFWRU EXW QRW WKH FKDUDFWHULVWLF IDLOV WR SURGXFH VLJQLnFDQW SURnWV LQGLFDWLQJ
WKDW WKH H[SODQDWRU\ SRZHU RI WKH FRYDULDQFH ZLWK +0/ LV ORZ LQ WKH SUHVHQFH RI WKH ERRN
WRPDUNHW FKDUDFWHULVWLF DQG WKH SULQFLSDO FRPSRQHQWV IDFWRUV 6LPLODUO\ WKH PRPHQWXP
FKDUDFWHULVWLF VHHPV WR KDYH PXFK VWURQJHU H[SODQDWRU\ SRZHU WKDQ FRYDULDWLRQ ZLWK WKH
PRPHQWXP IDFWRU +RZHYHU FRYDULDWLRQ ZLWK WKH PRPHQWXP IDFWRU GRHV QRW FRUUHVSRQG WR
D KLJK DYHUDJH PRPHQWXP UDQNLQJ DV VWUDWHJ\  H[KLELWV RQO\ D  PRPHQWXP UDQNLQJ
ZKLOH VWUDWHJ\  ZKLFK ORDGV RQ WKH PRPHQWXP FKDUDFWHULVWLF H[KLELWV D  UDQNLQJ
HJ ORQJ SRVLWLRQV DUH RQ DYHUDJH  PRPHQWXP UDQNV KLJKHU WKDQ VKRUW SRVLWLRQV
)LQDOO\ VWUDWHJLHV  DQG  DUH UHSHDWHG XVLQJ WKH )DPD DQG )UHQFK  IDFWRUV
LQ SODFH RI WKH SULQFLSDO FRPSRQHQWV IDFWRUV ZLWK QHDUO\ LGHQWLFDO UHVXOWV , UHIHU WR WKHVH
VWUDWHJLHV DV  DQG  DQG UHSRUW WKHLU UHVXOWV LQ 7DEOH 9 IRU UREXVWQHVV


+0 /

,0



2YHUDOO WKH HYLGHQFH VXJJHVWV WKDW ERRNWRPDUNHW DQG PRPHQWXP PD\ EH OHVV SODXVLEOH
DV $37 ULVN IDFWRUV VLQFH FRYDULDWLRQ ZLWK WKHVH YDULDEOHV LV ZHDNO\ UHODWHG WR DYHUDJH
UHWXUQV DQG DSSHDUV WR EH VXEVXPHG E\ WKH FKDUDFWHULVWLFV WKHPVHOYHV ,Q DGGLWLRQ WUDGLQJ
VWUDWHJLHV GHVLJQHG IURP ERWK WKH PRPHQWXP DQG ERRNWRPDUNHW FKDUDFWHULVWLFV VHHP WR
SURGXFH SURnWV RI VLJQLnFDQW PDJQLWXGH DQG VXpFLHQWO\ ORZ YDULDWLRQ JHQHUDWLQJ YHU\ KLJK
6KDUSH UDWLRV 7KLV VXJJHVWV WKDW WKH ERRNWRPDUNHW DQG PRPHQWXP DQRPDOLHV DUH QRW
OLNHO\ OLQNHG WR DQ XQLGHQWLnHG V\VWHPDWLF ULVN IDFWRU +RZHYHU VL]H DSSHDUV WR EH VXEVXPHG
E\ SUR[LHV IRU V\VWHPDWLF ULVN HLWKHU SULQFLSDO FRPSRQHQWV RU )DPD DQG )UHQFK 
IDFWRUV DQG ERWK WKH VL]H FKDUDFWHULVWLF DQG FRYDULDWLRQ ZLWK 60 % VHHP WR KDYH VLJQLnFDQW
H[SODQDWRU\ SRZHU

9

&RQFOXVLRQ

(VWLPDWLQJ WKH WLPHYDU\LQJ FRYDULDQFH PDWUL[ RI DVVHW UHWXUQV , nQG WKDW WKH VL]H DQRPDO\
LV PRUH FORVHO\ OLQNHG WR FRYDULDQFH ULVN WKDQ HLWKHU ERRNWRPDUNHW RU PRPHQWXP :KLOH
ERRNWRPDUNHW DSSHDUV ZHDNO\ OLQNHG WR WKH FRYDULDQFH PDWUL[ RI DVVHW UHWXUQV WKH PR
PHQWXP DQRPDO\ GRHV QRW DSSHDU WR EH UHODWHG DW DOO WR UHWXUQ VHFRQG PRPHQWV 7KHVH
nQGLQJV VXJJHVW WKDW WKH DQDPRORXV UHWXUQV DVVRFLDWHG ZLWK nUP VL]H DQG ERRNWRPDUNHW
PD\ EH GULYHQ E\ D VRXUFH RI V\VWHPDWLF YDULDWLRQ DQG WKDW SRUWIROLRV GHULYHG IURP VL]H
DQG ERRNWRPDUNHW DWWULEXWHV PD\ PDNH UHDVRQDEOH IDFWRUPLPLFNLQJ SRUWIROLRV LQ DQ $37
FRQWH[W +RZHYHU PRPHQWXP GRHV QRW DSSHDU WR EH UHODWHG WR FRYDULDQFH ULVN ,Q DGGLWLRQ
FRYDULDWLRQ ZLWK WKH PDUNHW SRUWIROLR GHVSLWH LWV ZHOOGRFXPHQWHG ODFN RI SRZHU IRU SUHGLFW
LQJ WKH FURVVVHFWLRQ RI H[SHFWHG UHWXUQV LV WKH VLQJOH PRVW LPSRUWDQW IDFWRU IRU GHVFULELQJ
WKH FRYDULDQFH PDWUL[ RI UHWXUQV SURYLGLQJ UHQHZHG VXSSRUW IRU D PDUNHW IDFWRU LQ DVVHW
SULFLQJ PRGHOV
2XU DQDO\VLV RQ WKH UHODWLRQ EHWZHHQ WKHVH DQRPDOLHV DQG FRYDULDQFH ULVN KHOSV GLVWLQ
JXLVK EHWZHHQ ULVNEDVHG DQG QRQULVN EDVHG H[SODQDWLRQV IRU WKHLU H[LVWHQFH LQ DQ $37 FRQ
WH[W +RZHYHU XQGHU D JHQHUDO HTXLOLEULXP IUDPHZRUN VXFK DV 0HUWRQ  WKHUH QHHG
EH QR OLQN EHWZHHQ WKH IDFWRUV ZKLFK DUH FRUUHODWHG ZLWK VWDWH YDULDEOHV WKDW GHVFULEH WKH
FKDQJLQJ LQYHVWPHQW RSSRUWXQLW\ VHW DQG WKH FRYDULDQFH PDWUL[ RI UHWXUQV &RQVHTXHQWO\
DOWKRXJK PRPHQWXP GRHV QRW DSSHDU WR EH UHODWHG WR FRYDULDQFH ULVN ZH FDQQRW UXOH RXW
WKDW PRPHQWXP LV QRW WLHG WR D ULVN IDFWRU LQ D JHQHUDO HTXLOLEULXP VHWWLQJ &RPSOHPHQW
LQJ WKLV VWXG\ /LHZ DQG 9DVVDORX  H[DPLQH WKH OLQN EHWZHHQ VL]H ERRNWRPDUNHW
DQG PRPHQWXP DQG IXWXUH HFRQRPLF JURZWK LQ DQ DWWHPSW WR OLQN WKHVH DQRPDOLHV ZLWK
WKH FKDQJLQJ LQYHVWPHQW RSSRUWXQLW\ VHW 7KH\ nQG WKDW ERWK VL]H DQG ERRNWRPDUNHW
KHOS IRUHFDVW IXWXUH *'3 JURZWK LQ WHQ LQWHUQDWLRQDO PDUNHWV EXW WKHUH LV YLUWXDOO\ QR


OLQN EHWZHHQ PRPHQWXP DQG IXWXUH HFRQRPLF DFWLYLW\ 7KXV XQGHU DQ $37 RU JHQHUDO
HTXLOLEULXP IUDPHZRUN WKH PRPHQWXP DQRPDO\ EHDUV OLWWOH UHVHPEODQFH WR ULVN \HW ERWK
VL]H DQG ERRNWRPDUNHW DSSHDU WR EH UHODWHG WR HFRQRPLF ULVN IDFWRUV )XUWKHUPRUH VLQFH
, nQG D ZHDN UHODWLRQ EHWZHHQ ERRNWRPDUNHW DQG FRYDULDQFH ULVN WKH UHVXOWV RI /LHZ DQG
9DVVDORX  VXJJHVW WKDW D ERRNWRPDUNHW IDFWRU PD\ EH EHWWHU WKRXJKW RI DV D SUR[\
IRU VWDWH YDULDEOHV UHSUHVHQWLQJ WKH FKDQJLQJ LQYHVWPHQW RSSRUWXQLW\ VHW UDWKHU WKDQ WLHG WR
DQ XQLGHQWLnHG $37 IDFWRU
)LQDOO\ WKH DQDO\VLV RI ULVN LQ WKLV VWXG\ IRFXVHG RQ WKH VHFRQG PRPHQW RI WKH UHWXUQ GLV
WULEXWLRQ ,I LQYHVWRUV FDUH DERXW KLJKHU UHWXUQ PRPHQWV WKHQ WKH VWUDWHJLHV H[DPLQHG PD\
EH PRUH ULVN\ WKDQ VXJJHVWHG KHUH $OWKRXJK DVVHW SULFLQJ PRGHOV ZKLFK LQFRUSRUDWH KLJKHU
PRPHQW IDFWRUV PD\ SURYH XVHIXO LQ DQDO\]LQJ DQG H[SODLQLQJ WKHVH HPSLULFDO DQRPDOLHV ,
OHDYH WKHVH LVVXHV IRU IXWXUH UHVHDUFK



5HIHUHQFHV
%DQ] 5ROI :  7KH UHODWLRQVKLS EHWZHHQ UHWXUQ DQG PDUNHW YDOXH RI FRPPRQ VWRFNV
-RXUQDO RI )LQDQFLDO (FRQRPLFV  
%DUEHULV 1LFKRODV $QGUHL 6KOHLIHU DQG 5REHUW 9LVKQ\  $ PRGHO RI LQYHVWRU VHQWLPHQW
 IRUWKFRPLQJ -RXUQDO RI )LQDQFLDO (FRQRPLFV
%DVX 6DQMR\  7KH UHODWLRQVKLS EHWZHHQ HDUQLQJV \LHOG PDUNHW YDOXH DQG UHWXUQ IRU
1<6( FRPPRQ VWRFNV )XUWKHU HYLGHQFH -RXUQDO RI )LQDQFLDO (FRQRPLFV  
%HUN -RQDWKDQ  6RUWLQJ RXW VRUWV IRUWKFRPLQJ -RXUQDO RI )LQDQFH
%KDQGDUL /D[PL &KDQG  'HEW(TXLW\ UDWLR DQG H[SHFWHG FRPPRQ VWRFN UHWXUQV
(PSLULFDO HYLGHQFH -RXUQDO RI )LQDQFH  
%ODFN )LVFKHU  &DSLWDO PDUNHW HTXLOLEULXP ZLWK UHVWULFWHG ERUURZLQJ -RXUQDO RI
%XVLQHVV  
%UHQQDQ 0LFKDHO - 7DUXQ &KRUGLD DQG $YDQLGKDU 6XEUDKPDQ\DP  $OWHUQDWLYH
IDFWRU VSHFLnFDWLRQV VHFXULW\ FKDUDFWHULVWLFV DQG WKH FURVVVHFWLRQ RI H[SHFWHG VWRFN
UHWXUQV -RXUQDO RI )LQDQFLDO (FRQRPLFV 
&DUKDUW 0DUN 0  2Q SHUVLVWHQFH LQ PXWXDO IXQG SHUIRUPDQFH -RXUQDO RI )LQDQFH
 
&RQQRU *UHJRU\ DQG 5REHUW .RUDMF]\N  5LVN DQG UHWXUQ LQ DQ HTXLOLEULXP $37
$SSOLFDWLRQ RI D QHZ WHVW PHWKRGRORJ\ -RXUQDO RI )LQDQFLDO (FRQRPLFV  
'DQLHO .HQW 'DYLG +LUVKOHLIHU DQG $YDQLGKDU 6XEUDKPDQ\DP  $ WKHRU\ RI RYHU
FRQnGHQFH VHOIDWWULEXWLRQ DQG VHFXULW\ PDUNHW XQGHU DQG RYHU UHDFWLRQV -RXUQDO RI
)LQDQFH  
'DQLHO .HQW DQG 6KHULGDQ 7LWPDQ  (YLGHQFH RQ WKH FKDUDFWHULVWLFV RI FURVVVHFWLRQDO
YDULDWLRQ LQ FRPPRQ VWRFN UHWXUQV -RXUQDO RI )LQDQFH  
'LQJ =KXDQ[LQ DQG 5REHUW ) (QJOH  /DUJH VFDOH FRQGLWLRQDO FRYDULDQFH PDWUL[
PRGHOLQJ HVWLPDWLRQ DQG WHVWLQJ :RUNLQJ SDSHU 8QLYHUVLW\ RI &DOLIRUQLD DW 6DQ 'LHJR
6DQ 'LHJR &$
)DPD (XJHQH ) DQG .HQQHWK 5 )UHQFK  &RPPRQ ULVN IDFWRUV LQ WKH UHWXUQV RQ
VWRFNV DQG ERQGV -RXUQDO RI )LQDQFLDO (FRQRPLFV  
)DPD (XJHQH ) DQG .HQQHWK 5 )UHQFK  0XOWLIDFWRU H[SODQDWLRQV RI DVVHW SULFLQJ
DQRPDOLHV -RXUQDO RI )LQDQFH  
)DPD (XJHQH ) DQG .HQQHWK 5 )UHQFK  9DOXH YHUVXV JURZWK 7KH LQWHUQDWLRQDO
HYLGHQFH -RXUQDO RI )LQDQFH  


)HUVRQ :D\QH 6HUJHL 6DUNLVVLDQ DQG 7LPRWK\ 6LPLQ  7KH DOSKD IDFWRU DVVHW SULFLQJ
PRGHO $ SDUDEOH :RUNLQJ SDSHU 8QLYHUVLW\ RI :DVKLQJWRQ 6HDWWOH :$
*LEERQV 0LFKDHO 6WHSKHQ 5RVV DQG -D\ 6KDQNHQ  $ WHVW RI WKH HpFLHQF\ RI D JLYHQ
SRUWIROLR (FRQRPHWULFD  
*ULQEODWW 0DUN DQG 0DWWL .HORKDUMX  7KH LQYHVWPHQW EHKDYLRU DQG SHUIRUPDQFH RI
YDULRXV LQYHVWRUW\SH D VWXG\ RI )LQODQG
V XQLTXH GDWD VHW IRUWKFRPLQJ -RXUQDO RI
)LQDQFLDO (FRQRPLFV
*UXQG\ %UXFH ' DQG - 6SHQFHU 0DUWLQ  8QGHUVWDQGLQJ WKH QDWXUH RI WKH ULVNV DQG
WKH VRXUFH RI WKH UHZDUGV WR PRPHQWXP LQYHVWLQJ :RUNLQJ 3DSHU 7KH :KDUWRQ 6FKRRO
+DZDZLQL * DQG '% .HLP  2Q WKH SUHGLFWDELOLW\ RI FRPPRQ VWRFN UHWXUQV :RUOG
ZLGH HYLGHQFH LQ +DQGERRNV LQ 2SHUDWLRQV 5HVHDUFK DQG 0DQDJHPHQW 6FLHQFH )LQDQFH
9ROXPH  E\ 5$ -DUURZ 9 0DNVLPRYLF DQG :7 =LHPED 
+RQJ +DUULVRQ DQG -HUHP\ & 6WHLQ  $ XQLnHG WKHRU\ RI XQGHUUHDFWLRQ PRPHQWXP
WUDGLQJ DQG RYHUUHDFWLRQ LQ DVVHW PDUNHWV IRUWKFRPLQJ -RXUQDO RI )LQDQFH
-HJDGHHVK 1DUDVLPKDQ DQG 6KHULGDQ 7LWPDQ  5HWXUQV WR EX\LQJ ZLQQHUV DQG VHOOLQJ
ORVHUV ,PSOLFDWLRQV IRU VWRFN PDUNHW HpFLHQF\ -RXUQDO RI )LQDQFH  
-HJDGHHVK 1DUDVLPKDQ DQG 6KHULGDQ 7LWPDQ  6KRUW KRUL]RQ UHWXUQ UHYHUVDOV DQG WKH
ELGDVN VSUHDG -RXUQDO RI )LQDQFLDO ,QWHUPHGLDWLRQ  
-HJDGHHVK 1DUDVLPKDQ DQG 6KHULGDQ 7LWPDQ  3URnWDELOLW\ RI PRPHQWXP VWUDWHJLHV
$Q HYDOXDWLRQ RI DOWHUQDWLYH H[SODQDWLRQV :RUNLQJ SDSHU 8QLYHUVLW\ RI 7H[DV DW $XVWLQ
.DXO * DQG 0 1LPDOHQGUDQ  3ULFH UHYHUVDOV %LGDVN HUURUV RU PDUNHW RYHUUHDF
WLRQ" -RXUQDO RI )LQDQFLDO (FRQRPLFV  
/DNRQLVKRN -RVHI $QGUHL 6KOHLIHU DQG 5REHUW 9LVKQ\  &RQWUDULDQ LQYHVWPHQW H[WUDS
RODWLRQ DQG ULVN -RXUQDO RI )LQDQFH  
/HGRLW 2OLYLHU DQG 3HGUR 6DQWD&ODUD  (VWLPDWLQJ ODUJH FRQGLWLRQDO FRYDULDQFH PD
WULFHV ZLWK DQ DSSOLFDWLRQ WR LQWHUQDWLRQDO VWRFN PDUNHWV :RUNLQJ SDSHU 7KH $QGHUVRQ
6FKRRO DW 8&/$ /RV $QJHOHV &$
/LHZ -LPP\ DQG 0DULD 9DVVDORX  &DQ ERRNWRPDUNHW VL]H DQG PRPHQWXP EH ULVN
IDFWRUV WKDW SUHGLFW HFRQRPLF JURZWK" :RUNLQJ 3DSHU &ROXPELD 8QLYHUVLW\ 1<
/LQWQHU -RKQ  7KH YDOXDWLRQ RI ULVN DVVHWV DQG WKH VHOHFWLRQ RI ULVN\ LQYHVWPHQWV LQ
VWRFN SRUWIROLRV DQG FDSLWDO EXGJHWV 5HYLHZ RI (FRQRPLFV DQG 6WDWLVWLFV  
/R $QGUHZ : DQG $ &UDLJ 0DF.LQOD\  :KHQ DUH FRQWUDULDQ SURnWV GXH WR VWRFN
PDUNHW RYHUUHDFWLRQ" 5HYLHZ RI )LQDQFLDO 6WXGLHV  


0DF.LQOD\ $ &UDLJ  0XOWLIDFWRU PRGHOV GR QRW H[SODLQ GHYLDWLRQV IURP WKH &$30
-RXUQDO RI )LQDQFLDO (FRQRPLFV  
0HUWRQ 5REHUW &  $Q LQWHUWHPSRUDO FDSLWDO DVVHW SULFLQJ PRGHO (FRQRPHWULFD 

0RVNRZLW] 7RELDV - DQG 0DUN *ULQEODWW  'R LQGXVWULHV H[SODLQ PRPHQWXP"
-RXUQDO RI )LQDQFH  
5RVHQEHUJ %DUU .HQQHWK 5HLG DQG 5RQDOG /DQVWHLQ  3HUVXDVLYH HYLGHQFH RI PDUNHW
LQHpFLHQF\ -RXUQDO RI 3RUWIROLR 0DQDJHPHQW  
5RVV 6WHSKHQ  7KH DUELWUDJH WKHRU\ RI FDSLWDO DVVHW SULFLQJ -RXUQDO RI (FRQRPLF
7KHRU\  
5RXZHQKRUVW . *HHUW  ,QWHUQDWLRQDO PRPHQWXP VWUDWHJLHV -RXUQDO RI )LQDQFH 

6KDUSH :LOOLDP )  &DSLWDO DVVHW SULFHV D WKHRU\ RI PDUNHW HTXLOLEULXP XQGHU FRQ
GLWLRQV RI ULVN -RXUQDO RI )LQDQFH  
6WDWWPDQ 'HQQLV  %RRN YDOXHV DQG VWRFN UHWXUQV 7KH &KLFDJR 0%$ $ -RXUQDO RI
6HOHFWHG 3DSHUV  



7DEOH ,
&RQGLWLRQDO 6SDQQLQJ 7HVWV RI 7UDGLQJ 6WUDWHJLHV

, FRPSXWH WKH UHVLGXDO UHWXUQV RI WKH WUDGLQJ VWUDWHJLHV    

 DQG
 XQGHU HDFK RI
WKH SURSRVHG IDFWRU PRGHOV LQ 6HFWLRQ % ZKHUH IDFWRU ORDGLQJV DUH H[WUDFWHG IURP WKH *$5&+HVWLPDWHG
FRYDULDQFH PDWULFHV 7KH UHVLGXDO UHWXUQV RI HDFK VWUDWHJ\ DUH GHnQHG DV WKHLU UDZ UHWXUQV PLQXV WKH
HVWLPDWHG IDFWRU ORDGLQJV WLPHV WKH IDFWRU UHDOL]DWLRQV ZKHUH IDFWRU ORDGLQJV DUH GHULYHG IURP WKH *$5&+
HVWLPDWHG FRYDULDQFH PDWUL[ WR DFFRXQW IRU WLPHYDU\LQJ ULVNV 7KH WLPHVHULHV DYHUDJH RI WKHVH UHVLGXDO
UHWXUQV RYHU WKH $XJ  WR -XO\  WLPH SHULRG DUH UHSRUWHG DORQJ ZLWK WVWDWLVWLFV IRU HDFK RI WKH
SURSRVHG IDFWRU PRGHOV H[FOXGLQJ IDFWRU PRGHOV WKDW FRQWDLQ WKH VWUDWHJ\ RI LQWHUHVW HJ WKH )DPD DQG
)UHQFK  PRGHO FRQWDLQV
DQG
DV IDFWRUV KHQFH , GR QRW FRPSXWH UHVLGXDO
RU
UHWXUQV XQGHU WKLV PRGHO , DOVR UHSRUW WKH UDZ UHWXUQV IURP WKHVH VWUDWHJLHV RYHU WKH VDPSOH SHULRG IRU
FRPSDULVRQ
,0

60 %

,0
PHDQ WVWDW
5DZ  

35 < 5

60 %

+0 /

+0/

60 %

3 5< 5
PHDQ WVWDW
 

60%
+0 /
PHDQ WVWDW PHDQ WVWDW
   

&$30 









)) 







&DUKDUW 



^
^

)),0

+0 /











3& 















83& 

















7DEOH ,,
&DSWXULQJ )XWXUH 6HFRQG 0RPHQWV

, H[DPLQH KRZ PXFK HDFK RI WKH WUDGLQJ VWUDWHJLHV DQG SULFLQJ PRGHOV FRQWULEXWHV WR FRQGLWLRQDO YRODWLOLW\ DV HVWLPDWHG
E\ WKH *$5&+ FRYDULDQFH PDWULFHV W  7KH CWUXH
FRYDULDQFH PDWUL[ DW WLPH  W LV GHnQHG DV  W ^
WKH PXOWLYDULDWH *$5&+ HVWLPDWHG PDWUL[ ZKLFK XVHV WKH VDPSOH PHDQ IURP WLPH  WR WR FRPSXWH UHVLGXDO
UHWXUQV DQG  WIXOO
 ^ D *$5&+ HVWLPDWHG PDWUL[ XVLQJ DOO DYDLODEOH IDFWRUV WR HVWLPDWH W  , HVWLPDWH WKH
FRYDULDQFH PDWUL[ LPSOLHG E\ HDFK PRGHO DV AW AW hA W AW  ZKHUH AW DQG hA W DUH H[WUDFWHG IURP W DQG PHDVXUH KRZ
IDU DZD\ WKH HVWLPDWHV DUH IURP W  WKH CWUXH
FRYDULDQFH
PDWUL[ E\ HPSOR\LQJ WKH IROORZLQJ WKUHH GLVWDQFH PHWULFV
RI WUDFNLQJ HUURU
+

'

W

WUDFH  AW
WUDFH  W
I 9

I 9

'

W 

WUDFH  W AW 
WUDFH  W 
I 9

b9

I 9

'

AW
W
W  WUDFH
WUDFH W
b

b 9 MJ

IM9

IM9

MJ

3DQHO $ UHSRUWV WKH WLPHVHULHV PHDQV RI WKH WKUHH GLVWDQFH PHWULFV IRU HDFK RI WKH WUDGLQJ VWUDWHJLHV DQG IDFWRU
PRGHOV DORQJ ZLWK ERRWVWUDSSHG VWDQGDUG HUURUV LQ SDUHQWKHVHV
3DQHO % H[WUDFWV WKH FRUUHODWLRQ PDWUL[ IURP WIXOO
 GHQRWHG bW  DQG FRPSDUHV LW WR WKH FRUUHODWLRQ LPSOLHG E\
HDFK PRGHO RU IDFWRU GHQRWHG bAW  XVLQJ WKH IROORZLQJ PHWULFV
A
bA W  W bWbAW  bWbAW   
W bWb bW  W  bW
b

W
W 
ZKHUH LV D   YHFWRU RI RQHV DQG UHSRUWV WKH WLPHVHULHV DYHUDJH DQG ERRWVWUDSSHG VWDQGDUG HUURUV IRU HDFK
VWDWLVWLF XQGHU HDFK IDFWRU PRGHO
+

&

u

&

u M

M u

M u

&

)DFWRU 0RGHO
0NW b UI
60 %
+0 /
3 5< 5
,0
))
)),0
&DUKDUW
3&
83&
5DQGRP

3DQHO $ &RYDULDQFHV
XOO
+W VDPSOH
+WI
IXOO PRGHO
'
'
'
'
'
'
  
  
  
  






  
  






  
  






  
  






  
  
  
  
  
  
  
  
  
  
  
  
  
  






  
  






  
  






  
  

3DQHO % &RUUHODWLRQV
XOO
+WI
IXOO PRGHO
&
&
&
  
  



  



  



  



  
  
  
  
  
  
  
  
  
  
  



  

LQGLFDWHV WKDW WKH VWDWLVWLF LV VLJQLnFDQWO\ GLmHUHQW IURP WKDW RI WKH UDQGRP PRGHO DW WKH  VLJQLnFDQFH OHYHO



7DEOH ,,,
&DSWXULQJ )XWXUH 6HFRQG 0RPHQWV ,QGLYLGXDO 6WRFNV

, FRQGXFW WKH VDPH DQDO\VLV DV 7DEOH ,, IRU LQGLYLGXDO VWRFNV XVLQJ UROOLQJ PRQWK UHJUHVVLRQV WR
HVWLPDWH IDFWRU ORDGLQJV IRU HDFK PRGHO %HFDXVH RI WKH ODUJH QXPEHU RI LQGLYLGXDO VWRFNV , VHOHFW
 VWRFNV UDQGRPO\ DW WLPH DQG FRPSXWH WKH FRYDULDQFH DQG FRUUHODWLRQ PHWULFV DV EHIRUH IRU
HDFK PRGHO , WKHQ UHVDPSOH DQRWKHU  LQGLYLGXDO VHFXULWLHV ZLWK UHSODFHPHQW DQG UHFRPSXWH
WKH PHWULFV UHSHDWLQJ WKLV SURFHVV  WLPHV +HUH , GHnQH WKH CWUXH
FRYDULDQFH PDWUL[ DW WLPH
DV WKH VDPSOH FRYDULDQFH PDWUL[ RYHU WKH SDVW  PRQWKV SOXV WKH SURGXFW PRPHQW PDWUL[  W W 
W

5 5

)DFWRU 0RGHO
0NW b U
I

60%
+0/
3 5< 5
,0
))
)),0
&DUKDUW
3&
83&

&RYDULDQFHV
'
'
'
  

&RUUHODWLRQV
&
&
&
 






































































































































































































7DEOH ,9
0LQLPXP 5HVLGXDO 9DULDQFH 3RUWIROLRV

, H[DPLQH WKH UHVLGXDO FRYDULDQFH PDWUL[ LPSOLHG E\ HDFK PRGHO E\ KHGJLQJ RXW WKH IDFWRUV DVVRFLDWHG ZLWK WKH PRGHO
, WKHQ IRUP PLQLPXP YDULDQFH SRUWIROLR ZHLJKWV IURP WKH UHVLGXDO FRYDULDQFH PDWUL[ lW  DQG DSSO\ WKHVH ZHLJKWV WR
UHVLGXDO UHWXUQV RXW RI VDPSOH ZKHUH UHVLGXDO UHWXUQV DUH DOVR GHnQHG DFFRUGLQJ WR WKH IDFWRU PRGHO 6SHFLnFDOO\

WKH UHVLGXDO UHWXUQ RQ WKLV SRUWIROLR LV GHnQHG DV aW ullW uu > aW AW aW @ ZKHUH LV D   YHFWRU RI RQHV W
W
LV WKH YHFWRU RI DVVHW UHWXUQV AW LV WKH   PDWUL[ RI IDFWRU ORDGLQJV HVWLPDWHG IURP WKH FRQGLWLRQDO FRYDULDQFH
PDWUL[ W  DQG W LV WKH   YHFWRU RI IDFWRU UHDOL]DWLRQV , FRPSXWH WKHVH UHVLGXDOV IRU HDFK IDFWRU PRGHO DQG
UHSRUW WKHLU VXPV RI VTXDUHV DV ZHOO DV WKHLU VXP RI VTXDUHG GHYLDWLRQV IURP WKHLU PHDQ LQ 3DQHO $ ,Q DGGLWLRQ ,
DOVR FRPSXWH SRUWIROLR ZHLJKWV XVLQJ RQO\ WKH GLDJRQDO HOHPHQWV RI lW HJ ZHLJKW E\ WKH LQYHUVH RI WKH HVWLPDWHG
YDULDQFH DQG HTXDOZHLJKW WKH  SRUWIROLR UHVLGXDO UHWXUQV 3DQHO % UHSRUWV WKH WLPHVHULHV PHDQV DQG WVWDWLVWLFV
RI WKH UHVLGXDO SURnWV IURP WKHVH PLQLPXP UHVLGXDO YDULDQFH SRUWIROLRV
b

b n )

d.

. d

3DQHO $ 0HWULFV RI 5HVLGXDOV

093
9DULDQFH 2QO\
(TXDO:HLJKW
3 a
3 a
3
3
3
3 a
(
( b ( 
(a 
(a b ( 
(a 
( b ( 
7

0 NW b U
60%
+0/
3 5< 5
,0
))
)),0
&DUKDUW
3&
83&
I












PHDQ
0 NW b U

60% 
+0/ 
3 5< 5 
,0 
)) 
)),0 
&DUKDUW 
3& 
83& 
I



















































3DQHO % 3RUWIROLR 5HVLGXDO 5HWXUQV
093
9DULDQFH 2QO\
(TXDO:HLJKW
WVWDW
PHDQ
WVWDW
PHDQ
WVWDW





















































7DEOH 9
2SWLPDO 7UDGLQJ 6WUDWHJLHV &KDUDFWHULVWLFV YHUVXV &RYDULDQFHV

3RUWIROLRV DUH GHVLJQHG WR ORDG RQ RQH RI WKH FKDUDFWHULVWLFV RU IDFWRUPLPLFNLQJ SRUWIROLRV GHULYHG
IURP WKH FKDUDFWHULVWLF ZKLOH DW WKH VDPH WLPH PLQLPL]LQJ YDULDQFH DQG KHGJLQJ RXW H[SRVXUH WR
RWKHU FKDUDFWHULVWLFV 7KH RSWLPL]DWLRQ RI VL[ VWUDWHJLHV DUH FRQGXFWHG IRU HDFK RI VL]H ERRNWR
PDUNHW DQG PRPHQWXP VWUDWHJLHV XWLOL]LQJ WKH FRQGLWLRQDO FRYDULDQFH HVWLPDWHV RI  SRUWIROLRV
YLD WKH /HGRLW DQG 6DQWD&ODUD  *$5&+ SURFHVV 7KH DYHUDJH PRQWKO\ SURnWV LQ
SHUFHQWDJH RI WKHVH VWUDWHJLHV RYHU WKH $XJ  WR -XO\  WLPH SHULRG DUH UHSRUWHG EHORZ
DORQJ ZLWK WVWDWLVWLFV LQ SDUHQWKHVHV 7KH ZHLJKWV RQ WKH VWUDWHJLHV DUH QRUPDOL]HG WR D GROODU
ORQJ DQG VKRUW 7KH XQFRQGLWLRQDO 6KDUSH UDWLRV RI WKH VWUDWHJLHV DUH DOVR UHSRUWHG DV ZHOO DV WKH
 
DYHUDJH FRQGLWLRQDO 6KDUSH PHDVXUH RI WKH VWUDWHJLHV GHnQHG DV
W
W W W W W
,Q DGGLWLRQ WKH DYHUDJH PLQLPXP DQG PD[LPXP ZHLJKW RQ DQ\ RI WKH  DVVHWV
DUH UHSRUWHG DV
ZHOO DV WKH VL]H ERRNWRPDUNHW DQG PRPHQWXP UDQN RI WKH DYHUDJH VHFXULW\ LQ HDFK VWUDWHJ\
6 KDUSH

Z 5

Z + Z

2SWLPL]DWLRQ 3UREOHP^7UDGLQJ 6WUDWHJ\








6L]H
0HDQ






WVWDW
     
6KDUSH

    
&RQGLWLRQDO 6KDUSH

    
$YJ PLQLPXP Z 






$YJ PD[LPXP Z 






VL]H UDQN

 
 

%(0( UDQN

 
 

PRPHQWXP UDQN

 
 

%(0(
0HDQ






WVWDW
     
6KDUSH

 
 

&RQGLWLRQDO 6KDUSH

 
 

$YJ PLQLPXP Z 

 
 

$YJ PD[LPXP Z 






VL]H UDQN

 
 

%(0( UDQN







 
 

PRPHQWXP UDQN
0RPHQWXP
0HDQ






WVWDW
     
6KDUSH
  
  
&RQGLWLRQDO 6KDUSH
  
  
$YJ PLQLPXP Z 

 
 

$YJ PD[LPXP Z 






VL]H UDQN

 
 

%(0( UDQN

 
 

PRPHQWXP UDQN

 



W



)LJXUH  7LPH9DU\LQJ 5HWXUQ 6HFRQG 0RPHQWV

7KH nJXUH SORWV UROOLQJ PRQWKO\ VWDQGDUG GHYLDWLRQ HVWLPDWHV RI WKH WUDGLQJ VWUDWHJLHV


   DQG
RYHU WKH VDPSOH SHULRG $XJ  WR -XO\  7KH VWDQGDUG GHYLDWLRQ HVWLPDWHV HPSOR\ WKH PRVW UHFHQW  PRQWKV RI
UHWXUQ GDWD )RU FRPSDULVRQ WKH VDPSOH VWDQGDUG GHYLDWLRQ RI HDFK VWUDWHJ\ RYHU WKH HQWLUH SHULRG LV DOVR SORWWHG )LQDOO\
XVLQJ WKH PRVW UHFHQW  PRQWKV RI UHWXUQ GDWD WKH WLPHVHULHV RI ODJJHG VTXDUH UHVLGXDOV VTXDUH URRW DUH DOVR SORWWHG
0 NW b UI

60 %

+0 /

35 < 5

,0

Sa m p le s tde v.

Mkt-rf

Sta n d ard de via tio n

0.1
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0

Aug-94

Aug-92

Aug-90

Aug-88

Aug-86

Aug-84

Aug-82

Sample stdev.

Sample stdev.

HML

Standard deviation

Standard deviation

Sample stdev.

PR1YR

Standard deviation



Aug-90

Aug-88

Aug-86

Aug-84

Aug-82

Aug-80

Aug-78

Aug-76

Aug-94

Aug-92

Aug-90

Aug-88

Aug-86

Aug-84

Aug-82

Aug-80

Aug-78

Aug-76

Aug-74

Aug-72

Aug-70

Aug-68

Aug-66

Aug-64

Aug-74

0.02

Aug-72

0.04

Aug-70

0.06

Aug-68

0.08

Lagged squared
residual (sqrt)

Aug-64

0.1

0.1
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0

Aug-66

Lagged squared
residual (sqrt)

Aug-94

Sample stdev.

IM

Standard deviation

0.12

Aug-92

Aug-90

Aug-88

Aug-86

Aug-84

Aug-82

Aug-80

Aug-78

Aug-76

Aug-74

Aug-72

Aug-64

Aug-94

Aug-92

Aug-90

Aug-88

Aug-86

Aug-84

Aug-82

Aug-80

Aug-78

Aug-76

Aug-74

0.01

Aug-72

0.02

0.01

Aug-70

0.03

0.02

Aug-68

0.04

0.03

Aug-66

0.04

Aug-64

Lagged squared
residual (sqrt)

0.05

Aug-70

0.05

0.06

Aug-68

Lagged squared
residual (sqrt)

Aug-66

0.06

Aug-94

SMB

Aug-92

Aug-80

Aug-78

Aug-76

Aug-74

Aug-72

Aug-70

Aug-68

Aug-66

Aug-64

L ag g e d s q ua red
res id u al (s qrt)

)LJXUH  *$5&+ YV 5ROOLQJ 2/6(VWLPDWHG 0DUNHW n

V

7KH nJXUH SORWV WKH *$5&+HVWLPDWHG PDUNHW EHWDV RI HDFK RI WKH WUDGLQJ VWUDWHJLHV

   DQG DJDLQVW
UROOLQJ UHJUHVVLRQ PDUNHW EHWD HVWLPDWHV RI WKH VWUDWHJLHV 7KH UROOLQJ UHJUHVVLRQV HPSOR\ WKH SULRU  PRQWKV RI UHWXUQ GDWD
IURP  WR  XVLQJ RUGLQDU\ OHDVW VTXDUHV
60 %

Wb

+0 /

35 < 5

Wb

HML

SMB

Correlation = -0.271

Correlation = 0.719
0.7

0.6

0.8
0.6

0.5

Aug-94

Aug-90

Aug-86

Aug-66

Aug-93

Aug-90

Aug-87

Aug-84

Aug-81

Aug-78

-0.6

Aug-75

-0.4

Aug-72

0
-0.1

Aug-69

-0.2

Aug-66

Regression

0.1

Aug-82

0.2

GARCH

0.2

Aug-78

Regression

Aug-74

0.3

Aug-70

GARCH

Beta

0.4

0.4

Beta

,0

M onth

Month

IM

PR1YR
Correlation = 0.215

Correlation = 0.111
0.6

1.5
1

0.4

0.5
-0.5

Regression

-1

GARCH

Regression

-0.2

-1.5
-0.4

-2
-2.5

Month

M onth



Aug-94

Aug-90

Aug-86

Aug-82

Aug-78

Aug-74

Aug-70

Aug-66

Aug-93

Aug-90

Aug-87

Aug-84

Aug-81

Aug-78

Aug-75

Aug-72

Aug-69

-0.6

Aug-66

Beta

GARCH

Beta

0.2