Jacques A. Schnabel

Sensitivity analysis and robust regression in investment performance evaluation

Abstract The novel statistical techniques of sensitivity analysis and robust regression are applied to the problem of measuring the performance of investment portfolios. The sensitivity of systematic risk estimates is gauged via the deletion of outliers from the data set. The robust regression procedure of least absolute residuals is employed to derive new estimates of Jensens measure of investment performance.

Short sales restrictions and the security market line

Abstract A reformulation of the CAPM is derived by taking account of short-sales restrictions on both risky and safe assets. The induced security market line is shown to be consistent with the empirical security market lines of various researchers.

Mean-variance analysis and the single-period inventory problem

The classic single-period inventory problem, colloquially referred lo in the literature as the newsboy problem, is examined assuming the objective of maximizing a mean-variance utility function. This objective function is intended to reflect different attitudes of decision makers towards risk. The optimal order quantity is derived and it is shown that under risk aversion the amount that is ordered is less than the amount ordered under risk neutrality. On the other hand, it is shown that the optimal order quantity when the decision maker is a risk lover is greater than it would be were he risk neutral. The problem is also considered when the ordering cost includes a fixed cost component in addition to the purely variable quantity purchase cost. For this case, an optimal (s, Q) policy is derived (where s is the reorder point and Q is the order quantity).

On the valuation of non-transferable employee share option plans

This paper derives a model for the valuation of non-transferable employee share option plans as an extension of Mayers’ model of capital market equilibrium in the presence of non-marketable assets.

Money illusion, beta perceptions, and capital market segmentation

This paper shown that in the context of tin; capital asset pricing model (CAPM), the existence of money illusion on the part of some investors induces segmentation in the financial market. That is, investors who suffer from money illusion would gravitate towards a subset of the securities available in the market, whereas investors who do not suffer from money illusion would gravitate towards the complementary subset of securities. This results in the invalidation of an important, corollary of the CAPM, i.e. all investors hold the market portfolio.

A note on takeovers and the market value rule

SummaryIt was shown that a popular model of capital market equilibrium implies that firm share demand curves are downward sloping. From this it was inferred that the potential goal divergence between management and shareholders is not necessarily removed by the threat of takeovers. Thus, nothing short of transforming management into shareholders via the device of share options may be effective in ensuring compatible financial criteria.

Dividend policy, liquidity needs, and the equilibrium valuation of shares

A pure exchange model of share market equilibrium is developed that takes explicit account of the liquidity services provided by a firms cash dividends. The simple paradigm of the Sharpe-Lintner-Mossin capital asset pricing model is exploited with complications introduced by the existence of stochastic liquidity needs as experienced by shareholders and transaction costs incurred when shares are liquidated to service these needs. The equilibrium expected rate-of-return on a share is shown to be a linear function of three factors : the covariance of the rate-of-return on the share with the rate-of-return on aggregate wealth, the covariance of the rate-of-return on the share with aggregate liquidity needs, and the shares dividend yield (i.e. terminal dividend per share divided by initial price per share). Implications of the model vis-a-vis the form of a market value maximizing dividend policy are considered.