Some are just better at piling it.
My Students Are Getting Their CFA Level 1 Results
For the first time, I have five students who sat for the CFA Level 1 Exam. Today's the day results are given out.
So far, three have reported in, and two of those passed. Well done, lads.
I have a bet with my Dean that three of the five will pass. So, I need one more out of the two remaining...
update: It's now three out of four (the 4th, who didn;t make it was in the top band of those that failed, so he should make it in December). I guess that means the Dean owes me dinner. Since the overall passing rate is 35%, our initial group of Level 1 test takers have done very well.
Note: if you want to calculate a rough estimate for your score, here's a link to a scoring calculator someone hacked together.
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So far, three have reported in, and two of those passed. Well done, lads.
I have a bet with my Dean that three of the five will pass. So, I need one more out of the two remaining...
update: It's now three out of four (the 4th, who didn;t make it was in the top band of those that failed, so he should make it in December). I guess that means the Dean owes me dinner. Since the overall passing rate is 35%, our initial group of Level 1 test takers have done very well.
Note: if you want to calculate a rough estimate for your score, here's a link to a scoring calculator someone hacked together.
Note: If you want to receive updates, either sign up for email on the right sidebar, or add our RSS feed to your feed reader.
Is There Predictive Power In The Option-Implied Volatility Smirk?
Apparently, the answer is yes. Xiaoyan Zhang (of Cornell), Rui Zhao (of Blackrock Inc.), and Yuhang Xing (of Rice University) recently conducted a study titled "What Does Individual Option Volatility Smirk Tell Us about Future Equity Returns?" Here's their abstract (emphasis mine):Basically, they calculate the "volatility smirk" (the difference between the implied volatility for At-The-Money (ATM) calls and Out-of-The-Money (OTM) puts) for individual stocks. They then sort firms into portfolios based on deciles of the smirk, and compare returns for the various portfolios (or for "hedge portfolios" constructed by shorting the "high smirk" decile and going long the "low smirk" decile) . The logic for this approach is the hypothesis that informed traders with negative news will choose to buy OTM puts, thereby causing a divergence in the IV of the puts vs for the call.
All in all, a pretty cool paper showing how information flows across markets. Given some work I'm doing with options data, I found it to be particularly timely.
Read the whole thing here.
HT: CXO Advisory Group
The shape of the volatility smirks has significant cross-sectional predictive power for future equity returns. Stocks exhibiting the steepest smirks in their traded options underperform stocks with the least pronounced volatility smirks in their options by around 15% per year on a risk-adjusted basis. This predictability persists for at least six months, and firms with steepest volatility smirks are those experiencing the worst earnings shocks in the following quarter. The results are consistent with the notion that informed traders with negative news prefer to buy out-of-the-money put options, and that the equity market is slow in incorporating the information embedded in volatility smirks.
All in all, a pretty cool paper showing how information flows across markets. Given some work I'm doing with options data, I found it to be particularly timely.
Read the whole thing here.
HT: CXO Advisory Group
Dan Ariely - Predictably Irrational At Google Authors
Here's a video of Dan Ariely (author of "Predictably Irrational") in his recent talk for the Google Authors program. Ariely has written a fascinating book about some of the cognitive and behavioral biases that most of us exhibit. If you listen carefully, you'll find that he even gives a hint about how to increase your student evaluations.
Finance: 0% Politically Correct
Inside Higher Education just highlighted some research done by Neil Gross, a sociology professor at Harvard, and Solon Simmons, a sociology professor at George Mason University. Here's the "punch line" from the summary:
In addition, the five disciplines next least likely to be politically correct were Biology(2%), Computer Science (3%), Accounting (4%), Marketing (4.5%), and Economics (4.7%). All in all, these numbers aren't surprising: I can't imagine what a politically correct approach tom teaching finance would entail (maybe an NPV of a project that differs based on the race, gender, or class of the project manager?).
Read IHE's summary here, and get the original article here.
HT: Marginal Revolution, who I'm less politically correct than.
Humanities and social science fields tend to have higher politically correct rankings, while professional and science disciplines do not. The table that follows is in order of political correctness. Psychology is the only field where a majority of professors are politically correct. Four fields — finance, management information, mechanical engineering and electrical engineering — had no one who was politically correct (emphasis mine).
Read IHE's summary here, and get the original article here.
HT: Marginal Revolution, who I'm less politically correct than.
Extension Risk and Mortgage Backed Securities
I'll probably be teaching Fixed Income class next year when a colleague goes on sabbatical. I'll try as much as possible to tie the class in with the CFA curriculum. One of the big topics in the Level 2 CFA Fixed Income material is the issue of extension and contraction risk for mortgage backed securities (MBS).
In case you're not familiar with the terms, contraction risk is the risk that repayments of principal on the mortgages underlying the MBS will be higher than expected, thereby resulting in a lower than expected maturity on the security. Extension risk is the opposite (lower than expected repayments, and a stretching of the MBS security's maturity.
Accrued Interest just put up a great piece on the topic. In short, it talks about how the problems in the mortgage markets will result in extension risk being higher than expected. The general drop in the real estate market has resulting in people having lower than expected equity in their homes (in some cases, they're "upside down", with home values lower than the outstanding balance). In addition, lenders have become very skittish about lending with less than 20% equity. So, there will be less refinancing activity than in predicted in most pricing models. As a result, there'll be a lengthening in the average maturity of the typical MBS (i.e. more extension risk).
Read the whole thing here.
In case you're not familiar with the terms, contraction risk is the risk that repayments of principal on the mortgages underlying the MBS will be higher than expected, thereby resulting in a lower than expected maturity on the security. Extension risk is the opposite (lower than expected repayments, and a stretching of the MBS security's maturity.
Accrued Interest just put up a great piece on the topic. In short, it talks about how the problems in the mortgage markets will result in extension risk being higher than expected. The general drop in the real estate market has resulting in people having lower than expected equity in their homes (in some cases, they're "upside down", with home values lower than the outstanding balance). In addition, lenders have become very skittish about lending with less than 20% equity. So, there will be less refinancing activity than in predicted in most pricing models. As a result, there'll be a lengthening in the average maturity of the typical MBS (i.e. more extension risk).
Read the whole thing here.
Your Daily Dose of Patriotism
I'm a big Muppets fan, so I thought this was hilarious. My favorite part is around 1:12 (I always had a soft spot for Animal...).
HT: Neal Boortz
HT: Neal Boortz
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