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Showing posts from June, 2009

A Simple (and Impressive) New Three Factor Return Model

First, a little background on "factor models": The CAPM model for estimating expected returns is the oldest and most widely know of all finance models. In it, exposure to systematic risk (i.e. beta) is only factor that gets "priced" (i.e. that's related to expected returns).

In 1993, Fama and French showed that a three factor model (the CAPM market factor plus a size factor and a value/growth factor), did a much better job of explaining cross-sectional returns when compard to the "plain vanilla" CAPM.

Since the FF model became popular, a number of studies have come out that identify other factors that seem to be associated with subsequent returns, such as momentum (Jegadeesh and Titman, 1993), distress (Campbell, Hilscher, and Szilagyi, 2008), stock issues (Fama and French, 2008) and asset growth (Cooper, Gulen, and Schill, 2008).

Now, on to the meat of this post - another factor model. This one is based on q-theory (i.e. on the marginal producti…

What's going on in the Unknown Family

Here's a short update on goings-on in the Unknown Household:
The Unknown Daughter is now done with school for the summer. I get a feeling that she'll be doing a lot of social activities this summer - since Friday (the last day of school), she's already had one sleepover (at a cousin's house), and has her second one (at our house) this Wednesday. In addition, she's just finished Neil Gaiman's The Graveyard book. She gets a real kick out of describing the plot to others - it's an unusual tale where the humans are largely the evil characters, and the supernatural ones (ghosts, vampires, werewolves, etc) are the good guys. Next on the agenda is Madeiline L'Engle's A Wrinkle in Time (she just finished the 6th Harry Potter book, and is looking for some variety before tackling the 7th). All in all, not bad for someone who just finished 2nd grade.The Unknown Baby is now starting to make sounds - a LOT of sounds. So, he's become the star of …

Even Children Can Understand Economics

Every once in a while (actually, make that "on a regular basis), the Unknown Daughter comes out with something that really floors me.

The other day, UD was asking about my grandparents. I told her that both grandfathers worked it the fabric mills in my hometown (back in the day, there were three mills in town). Somehow, the topic morphed into what happened to the mills, so I told her that the mills eventually moved a lot of their business down south, and then (eventually) overseas.

"Why?" she asked?

I answered, "Because the people there would work in the factories for less, so the mill owners could make the fabric more cheaply. Unfortunately, that means that a lot of the workers in the mill lost their jobs."

"So why did they do it if the workers lost their jobs?"

"Well UD, since it cost less to make, they could sell the fabric at a lower price. So, while the workers lost jobs, the people who bought it actually benefited. This means that som…

A Good Private Equity Blog

Thanks to Analyst Forum (one of my regular stops), I just came across a pretty good blog on Private Equity called The Private Equiteer. It has a lot of posts that go through the basics of the private equity world (here's a list of many of them).

I'm adding it to the blogroll.

That D@!* Musical Swing (Punisher Version)

Like many new parents, we use a battery-powered swing to help the Unknown Baby Boy fall asleep for his naps. Our model comes with a musical option that plays an assortment of tunes. They range from "Ode to Joy" to some pretty irritating, calliope-sounding music that could be easily be heard at the circus. But one song in particular makes me smile every time I hear it.

The Unknown Wife asked why, so I showed her this clip (I just linked it because embedding was disabled for this clip). Caution - turn the sound down, because it cuts to a pretty loud, discordant piece near the end.

The Unknown Wife said she'll never hear that tune again without seeing this clip in her mind's eye.

Mission accomplished - my work here is done.

On Teaching Math

The Unknown Daughter is also known by most of my family as "The Math Princess." She seems to get math concepts more quickly than almost anyone else at her grade level. Well, there is one one boy in her class who is just about at her level, but she has a better Rear Naked Choke than him (knowing what boys can be like, I started teaching her various martial arts techniques at age 4 - I figure if she cripples the first boyfriend, my work is largely done).

She's really good at the rote learning/memorization/multiplication tables part of math, and that's important (hey - if you know your tables cold, many things seems to get easier). But what makes me happiest is that she really enjoys the math puzzles I give her. When she finally sees a pattern, she gets really excited. For example, when she realized that she could use the distributive law (i.e a(b+c) = ab + ac) to do mental math, she got really excited.

So, I enjoyed this piece titled "A Mathematician's Lament

How Much Is $100 Million?

This posting is WAAAAY late, but It's still good. As a "perfesser" type, I always enjoy a good visual aid.

Back in April President Obama had announced that he's try to cut $100 Million in spending from the budget. Most people have a hard time visualizing large figures, and an even worse one with fractions or percentages. So,here's a great illustration of what the $100 million means in terms of tital expenditures:

Whether you agree or disagree with Obama's policies, you have to admit - this is brilliant!

A Good Paper on "Return Factors"

Robert Haugen is one of (if not THE) best-known figure in the behavioral finance (i.e. "markets are not efficient") camp. He wrote one of the earliest books on the topic in 1995 (The New Finance) and runs a quantitative finance shop based on much of his research. In a recent paper with Nardin Baker of UC-Irvine, he examines the explanatory and predictive ability of a wide array of observable factors. Here's the abstract
This article provides conclusive evidence that the U.S. stock market is highly inefficient. Our results, spanning a 45 year period, indicate dramatic, consistent, and negative payoffs to measures of risk, positive payoffs to measures of current profitability, positive payoffs to measures of cheapness, positive payoffs to momentum in stock return, and negative payoffs to recent stock performance. Our comprehensive expected return factor model successfully predicts future return, out of sample, in each of the forty-five years covered by our study save on…

It Is Done, And Yet Also Just Beginning (updates)

At 1:55 this morning, the Unknown Son (his name is Jonathan, by the way) eased away and stopped breathing. Our son has finally let loose the bonds of earth and gone home. No more suffering, no more limitations, and no more cancer. He now rests in the lap of the Father with his cousins Jacob and Jennifer. And that's NOT a figure of speech - it's a description.

It's been a tough time - 2,439 days since his diagnosis on 10/1/2002. After gallons of chemotherapy, multiple surgeries, and visits to six hospitals, our son is finally free. After years of pain and limitations, he can now run without tiring, jump without limits, and stay up as long as he wants.

We miss him, and will every day for the rest of our earthly lives. But believe it or not, it's not all grief (but there is that). We're glad that his pain and struggles are over. But now he doesn't just have the absence of pain. He has JOY. For him, this isn't the end - merely the end of the beginn…

A Fairly High Profile (Non) Tenure Case

Inside Higher Education profiles the tenure case of Boyce Watkins, an untenured African-American assistant finance professor at Syracuse University. He was recently denied tenure.

What make his case interesting is that he's been quite possibly one of the highest-profile assistant professors at a non-tier1 school I've ever seen. He's got a list of media appearances longer than my arm (heck - longer than both arms), all of which you can see on his website here. His research record has been fairly good (not outstanding, but not terrible), with a couple of solid b-level publications (both sole-authored), and a number of pubs in lower-tier outlets.

My take is that he ruffled feathers. Whether fair or not, most assistant professor are not clear slam-dunks for tenure. Since most are therefore somewhere near the margin, the non-publishing things end up having a disproportionate impact. So, having a reputation for being a "good" colleague makes a big impac…

Tough Times Ahead

This tough to write. The recent post on the Unknown Son's treatment was somewhat encouraging. In the blink of an eye, this one turns our lives around 180 degrees.

This morning, Unknown Son tried to go for a walk around the hospital unit (the walking helps expand the lungs, and would speed his recovery). We noticed after a few steps that his left leg was dragging. We put him back in bed, and he was unable to squeeze my hand with his left hand. A quick CT scan followed, and revealed that the cancer had spread to his brain – in three separate spots. We hadn't known this previously since all our scans had been focused on his chest region. One was pretty large, and since it was on the right side, it was the likely cause of the problems with his left leg, arm, and hand.

This changes everything – he now likely has a matter of days rather than weeks. We gave him some radiation to see if we could slow the swelling, but at best that only buys a bit of time. So, we took him home to…

Rediscovering Late Night TV

The Unknown Wife is a morning person, and I'm a night owl. So, I usually get the later feedings for the Unknown Baby Boy. He gets fed around 8 or 9, and then I hang out until his next feeding (sometime between 11 and 1). The little guy usually sleep for 4 hours, and the Unknown Wife takes the next feeding. Since she drops off around 9, she gets a good 6-7 hour uninterrupted sleep stretch.

Because of the schedule, I'm up until 12 or 1 most nights. I do a little work on the computer (o.k., a lot of web-surfing and a little work, but let's not quibble). But I've also gotten reacquainted with late-night television. Between Deadliest Warrior, the UFC (and WEC) and 1,000 Ways To Die, (thank you, Spike TV)I get my guy stuff out of the way while Unknown Wife is already asleep.

Who knows - maybe it'll have a subliminal effect on Unknown Baby Boy.

Students Sitting For the CFA Exams

I just realized that I have at least six students that I know of sitting for the CFA exams in a couple of days. Three are sitting for Level 1 - all either graduated this past month or last December, and three are sitting for Level 2 (they graduated either last June or last December). There are a couple of other former students who'd indicated they might be taking the Level 1 exam, but that was a while back and I hadn't heard from them since.

Good luck, one and all.

Bad Biopsy News

About a week back, the Unknown Son had a CT scan that showed some suspicious spots in his right lung. He had his biopsy today.

Unfortunately, the news wasn't good. His cancer (Wilms Tumor) has recurred. According to the surgeon, there was at least one clear tumor (pea-sized) in his right lung, and clear evidence that it had also metastasized into some of the lymph nodes. I'm currently in the ICU with him as he recovers from the biopsy, and I'll spend the night (the Unknown Mom will take over tomorrow).

He's awake and in good spirits. Looks like we'll be watching Sponge Bob DVDs for a while longer, followed (hopefully) by sleep).

I'll post more information as I get it.

update: It's the morning after, and he's doing well - his fever has broken, he's talking up a storm, getting all the tubes out except for his chest drainage tube, and about to start drinking fluids on his own.