Nelson J. Lacey

An estimation of market efficiency in the NFL point spread betting market

In an efficient NFL beting market, point spreads incorporate all relevant information contained in past game outcomes. Efficiency implies that trading rules based on past game outcomes should not be able to produce a consistent pattern of winners over losers. This study identifies 15 trading rules based on historical game outcomes and, using simulated gambling, tests them over the 1984–1986 NFL seasons. The studys main finding indicates that the NFL betting market is efficient, but does identify a small set of profitable trading rules over this time period.

Convexity, Risk, and Returns

This paper tests empirically whether convexity is return enhancing (the traditional view based upon parallel term structure shifts), or return diminishing (the equilibrium view suggesting convexity is priced). Results of empirical tests over different time periods show bond convexity to be either insignificantly or negatively related to ex-ante bond returns. These results are consistent with the critique of the traditional duration model by Ingersoll, Skelton, and Weil [1978] and suggest that bond convexity may be priced. Further, the magnitude of bond convexity is shown to be related directly to the immunization risk inherent in a bond portfolio, consistent with the implications of Fong and Vasiceks [1983, 1984] M-Square model.

The “Second” Season The Effects of Playoff Tournaments on Competitive Balance Outcomes in the NHL and NBA

Most research on competitive balance (CB) in North American sport leagues examines regular-season outcomes only, and does not analyze the potential impacts of postseason playoff tournaments. This article finds that playoffs do matter in a CB sense, in that they can substantially reconfigure regular-season outcomes. More importantly, they may reconfigure outcomes in a way that is not neutral with respect to payroll. The article finds, for example, that in the NHL over the 1994-2004 time period, team success in the playoffs was much less dependent on payroll than it was during the regular-season. The article also analyzes the differential impacts of the specific type of playoff tournament employed, and finds that the choice of playoff “pooling” structures directly impacts the probability of “upsets” occurring in the playoffs.

Closed-Form Solutions of Convexity and M-Square

Closed-form formulas for Macaulay duration, as given by Babcock and Chua, provide the user with a less cumbersome and more efficient procedure for calculating duration. Recent developments, however, have suggested alternative measures of bond portfolio immunization designed to overcome the severe restrictions that Macaulay duration places on permitted interest rate behavior. This note presents closed-form formulas for two such alternative measures - convexity and M-square and demonstrates how these measures can be used in an immunization strategy.

Generalized solutions of higher-order duration measures

Abstract Higher-order duration measures have been shown to permit near perfect immunization. This paper presents formulae for these measures which are valid not only at coupon payment dates but between these dates as well We show that errors caused by using formulae valid only at the coupon payment dates increase as one advances from lower-order to higher-order duration measures. A portfolio immunization example comparing both traditional and generalized closed-form solutions is given.

Closed-Form Solutions of Higher Order Duration Measures

This paper derives formulas for higher order duration measures, including D(1) (i.e. Macaulay duration), D(2) (i.e., slope duration), D(3) (curvature duration), etc. We develop a general iterative method to obtain formulas for any higher order measure D(m), for an arbitrary positive integer value for m. The higher order duration measures can be used to hedge against virtually any type of interest rate shift. Our algorithm can be easily adapted for spreadsheet applications.

Immunizing bond portfolios in a multiple term structure economy

Abstract This paper develops a new immunization model in a multiple term structure economy. Multiple term structures would exist, for example, in international bond portfolios whose constituent securities differ with respect to default probabilities and/or liquidity. With multiple term structures, we show that the immunized planning horizon is not at the point of portfolio duration, but at a new point defined through future value duration.

Reexamining fund manager skill from a new angle

– The purpose of this paper is to examine managerial skill of US equity mutual funds in the context of both abnormal return and risk. , – The authors evaluate manager skill based on the outperforming probability and cumulative distribution function of the actual funds and the bootstrapped funds. And the authors recognize the role of fund life cycle and use different evaluation horizons to control for fund age and the overall state of the market. , – The authors find that a small percentage of equity funds can beat the market, and the percentage is overall higher than what the control group would predict. The authors find no evidence of persistence. The authors also document that the chance of underperformance is much higher than what the authors had expect from the control group. Taking the risk-return tradeoff into account, any performance advantage of actual funds over bootstrapped funds is correlated with tail risk, and a robustness check confirms this finding. , – The authors find that the outperforming probability itself is not enough to confirm the existence of manager skill. The complete story of mutual fund alpha, should it exist, would not be complete without incorporating both risk and luck.

Mutual Fund Outperformance: Is It Skill, Risk, or Luck?

This paper examines managerial skill of U.S. equity mutual funds in the context of both abnormal return and risk. We recognize the role of fund life cycle and use different evaluation horizons to control for fund age and the overall state of the market. We find that a small percentage of equity funds can beat the market, and the percentage is overall higher than what the control group would predict. We find no evidence of persistence. We also document that the chance of underperformance is much higher than what we’d expect from our control group. Taking the risk return tradeoff into account, any performance advantage of actual funds over bootstrapped funds is correlated with tail risk, and a robustness check confirms this finding. Thus, the complete story of mutual fund alpha, should it exist, would not be complete without incorporating both risk and luck.

On Understanding Bear Market Funds

Despite poor performance, bear market funds have been growing rapidly in recent years. The authors find that while bear funds exhibit timing ability, this surprisingly does not translate into enhanced return performance. They also find that bear funds tend to be risk-seeking at a time when market volatility is high. The results are consistent with viewing these funds not in the more traditional context of return maximization, but instead in the context of risk management. In other words, bear market funds decrease return volatility of the fund family at the cost of a slightly lower fund-family return.