Terry L. Zivney

Financial Management (1972-1994): A Retrospective

Financial Management has published more than 800 papers from 1972 through 1994. This article documents the influence of FM on financial research, financial education, and financial practice. The evolution of subject coverage over time is discussed . The FM articles most cited in journals and text books are identified. FM ranks near the top of finance journals in every criterion examined.

The Academic Community's Revealed Preferences Among Insurance Periodicals

University library subscription policies are based on the educational and research needs of a school. These subscription policies partially reflect the wishes of academics in insurance, who participate in the selection of insurance periodicals. These academic preferences are revealed in subscription practices. Using a national computerized library data base of current university library holdings, this article tests several hypotheses with regard to insurance subscriptions in university libraries. The article provides a comprehensive review of current insurance periodical subscription policies and academic preferences at several different types of schools.

Hedging individual mortgage risk

Abstract This paper investigates the feasibility of an individual hedging the interest rate risk involved in planning to take out a mortgage at a future point in time. Simulation using market data indicates that a simple futures hedge reduces the variation in mortgage capacity by about one half. Expected mortgage capacity is very close to 100% of the original capacity at a very low cost. Hedging the individual mortgage with a put futures option is less effective in reducing downside risk and has a higher expected cost.

Where are the Dow Jones Index Funds

n the past twenty years, hundreds of bdlions of dollars have flowed into investment portfolios that are designed I to mimic one or another stock market index. Of the some 7,000 mutual funds Morningstar follows, 115 are classified as index funds. Although the most commonly used index has been the S&P 500, a number of mutual funds also follow indexes of small stocks, foreign stocks, and even individual industries. The most widely followed index of all, the Dow Jones Industrial Average, has failed to spawn a successful index fund. Why? With all the free publicity given to the Dow each day, a Dow index hnd would appear to be a certain success.l This article explores various possible explanations for this puzzle. We examine the performance such a Dow index fund could be expected to have, as well as a number of legal and theoretical factors. Theory suggests that a less-than-fully &versified fund such as a Dow fund would have inferior risk-return trade-offs; this would make the fund less attractive to knowledgeable investors. Still, stu&es of mutual funds that are around today invariably find that most funds have inferior risk-return trade-offs and still attract billions of dollars of investors’ money. Our tests of the riskreturn performance of a Dow index fund enable us to ascertain whether an attractive investment opportunity has been overlooked. Although there is evidence, both academic and popular, that documents the benefits of index funds trachng the S&P 500, no one has published definitive research on the investment results of actually buying and holdmg a Dow Jones index portfolio. Writers who discuss the DJIA focus on the level of the index, not the returns to investing in the stocks constituting the index. That is, they generally ignore the impacts of reinvesting cash dividends, of rebalancing the index after stock splits or substitutions, and of corporate repurchases of stock. Knowledge of the returns to the portfolio is necessary in order to accurately judge the effective risk-return trade-off from investing in the Dow. This is especially true because the DJIA has “outgained” the S&P 500 in many recent periods, such as since 1995. The greater “gains” in the Dow are sure to attract the attention of individual investors. Whether the greater apparent returns are justified by the risk of the index has not been determined.

A simplified approach to measuring bond duration

Abstract Because interest rates vary over time, the realized return on a fixed-income investment will depend on the price at which the instrument is ultimately liquidated and the rate at which interim cash flows are reinvested. This variation in realized return, known as interest-rate risk, should be addressed by both individual and institutional investors. Tools for measuring the impact and adjusting for the effects of interest rate changes on fixed-income instrument performance have long been available with duration and its companion adjustment factor, convexity. In this article, a simplified alternative to the traditional complex duration calculation is developed and demonstrated. Thus, anyone who can calculate a bond price can quickly estimate the interest rate risk associated with a bond as well as calculate the expected bond price change for a given change in market yield-to-maturity.

Enhancing stock returns using hedged dividend capture

Purpose – This paper aims to explore the potential use of a dividend capture strategy by individual investors. This strategy arises from the 2003 tax law changes which lowered tax rates on dividends received, while leaving the short-term tax rates on capital losses unchanged. In addition, leverage can be used in combination with an aggressive call-writing strategy to receive a multiple of the tax-advantaged dividend yield without a corresponding increase in risk. Design/methodology/approach - In addition to illustrating how the dividend capture strategy works, a new method of comparing returns between strategies is developed. This method does not rely on a particular risk-return model, such as is used by the Sharpe ratio or Jensens alpha methodologies. Finally, a formula is derived which computes the borrowing (margin loan) rate that makes the aggressive call-writing strategy profitable. Findings - The 2003 changes in US tax laws provide individuals with an opportunity to apply dividend capture techniques similar to those which have been available to corporations for many years. However, corporations use dividend capture techniques to lower risk, while individuals require risk exposure to keep the possibility for capital gains. Thus, a method is developed for capturing an enhanced tax refund on the drop in stock price caused by the stock going ex-dividend without giving up the potential for capital gain. A byproduct of this method is a straightforward means to measure risk-adjusted returns for the covered call strategy. The aggressive call-writing strategy described in this paper is found to offer enhanced returns without an increase in risk for those in the top individual tax brackets. Research limitations/implications - The specific level of additional risk-adjusted returns available depends on the tax rates and interest (margin loan) rates facing the investor. Practical implications - Following the 2003 tax law changes, individuals can receive returns on stocks higher than implied by the statutory tax rate on dividends by employing a dividend capture strategy which involves writing call options on dividend-paying stocks. This paper also demonstrates that the risk exposure necessary to obtain full capital gains potential can be maintained with an aggressive strategy. This strategy inherently provides a method to judge the extent of improvement without having to rely on questionable assumptions of any specific asset-pricing model. Originality/value -The paper provides an alternative to conventional covered call-writing strategies which reduce exposure to capital gains. Individual investors and their advisors will find a method to maintain exposure to market risk and therefore the full potential for capital gains, while receiving preferential tax treatment on dividends received. Researchers will find a method to directly compute risk-adjusted return for covered call-writing strategies without having to rely on assumptions made in the asset-pricing models underlying the Sharpe ratio and Jensens alpha.