Randall S. Billingsley

Benefits and Limitations of Diversification Among Commodity Trading Advisors

DON M. CHANCE is First Union professor of financial risk management at Virginia Tech. he benefits of diversification have been wellestablished since the early work of Markowitz [1952] and the formal proofs of Samuelson T [1967]. Modern capital market theory demonstrates that the value of &versification is bounded by the systematic risk of the market as a whole. In recent years, however, pension and endowment funds are turning to futures markets, looking for reductions in systematic risk. Some strategies involve hedging with market index or other futures contracts. Others involve the establishment of managed futures programs, often employing numerous managers who are called commodity trading advisors or CTAs. In thls article, we examine the benefits and limitations of diversieing across commod~ty tradmg advisors. Do such programs benefit investors the way that adding more securities to a portfolio has a diversifjmg effect? The answer to this question has important implications for assessing the general effect of diversification on portfolio risk. Beyond that, however, it is important for a significant segment of the investment community. Exhibit 1 shows the growth of the managed futures industry in the U.S. since 1980 in billions of dollars under management. These figures represent funds placed with CTAs for speculative trading in futures, and do not reflect hedging or trading of overthe-counter derivatives. The estimated amount for 1994 is

Regional reciprocal interstate banking: The Supreme Court and the resolution of uncertainty

25.6 billion. Although 1994 and 1995 produced two highly publicized cases of institutions terminating their managed

Put—call ratios and market timing effectiveness

Abstract In 1985, the Supreme Court affirmed the ability of the states to enter into regional reciprocal compacts in Northeast Bancorp, Inc., et al., v. Board of Governors of the Federal Reserve System. The current study tests the hypotheses that the Courts decision exerted a material influence on the wealth of shareholders in bank holding companies (BHCs) operating within regional banking compacts and that shareholder reactions were affected by the size of their BHC as a proxy for the likelihood that a BHC would be an acquiror vs. a target in the new legislative climate. The analysis uses a sample of 52 BHCs that were members of regional interstate banking compacts and a control sample of 107 BHCs based in states that had not passed such enabling legislation as of the event date. Both portfolios of BHCs exhibited a statistically significant average positive reaction to the Supreme Court decision. Further, there is evidence that the average BHC in each group reacted significantly differently to that event. The reactions of BHCs in regional compacts were associated negatively with their relative size within their respective regional compact but related positively to their absolute size. Interestingly, the reactions of BHCs in the control sample were also negatively associated with their relative size within their home offices state but also positively related to their absolute size. All in all, shareholders viewed the interstate banking opportunities brought by the Supreme Court decision to be consistent with their interests.

A Trading Strategy to Profit from Overly Aggressive Downward Earnings Guidance

A lmost every week Barron’s column, “The Striking Price,” quotes a noted market analyst’s interpretation of recent put-call ratio (PCR) figures. The PCR is the ratio of the volume of puts traded to the volume of calls traded. The ratio is often calculated using daily or weekly volume figures for the S&P 100 Index Option (OEX) and for the Chicago Board Options Exchange (CBOE) equity options. While the PCR is popularly cited and used in market timing strategies, its effectiveness has yet to face systematic scientific scrutiny. We remedy this apparent oversight by using market data to evaluate whether PCRs are helpful indicators or simply a proverbial fly in the technician’s ointment.

Regulatory Uncertainty, Corporate Expectations, and the Postponement of Investment: The Case of Electricity Market Deregulation

The empirical evidence presented in this article suggested that it is potentially possible for an informed trader in after-hours trading to earn abnormal returns from identifying and investing in stocks with a positive earnings surprise. The strategy is based on a simple (naïve) moving average time series forecast of earnings, conditional on the moving average forecast and the last analyst s forecast both being positive, and with the former being larger than the latter. These are likely firms that have been either subject to aggressive downward earning guidance or just firms for which analysts have become less favorably inclined about earnings prospects. These findings should prove useful to informed investors who trade or construct portfolios based on the information in earnings surprises.

Why Do Firms Issue Convertible Debt

We examine whether regulatory uncertainty encourages firms to delay capital investment decisions. The case of electricity market deregulation in the U.S is unique because the period of regulatory uncertainty is long-lived and there are data available on planned future investments. These previously unused expectational data provide unique insight into the broader effects of regulatory uncertainty. Relying on a real options modeling perspective, we hypothesize that industry participants reduced their investments in electric power-generating assets dramatically in the 1990s in response to increased regulatory uncertainty and then, just as dramatically, increased investment beginning in 2000 due to the resolution of some regulatory uncertainty. We provide empirical evidence that regulatory uncertainty is significantly and strongly negatively related to planned utility investments. This negative effect is 44% stronger for so-called green technologies.