Scenarios for Risk Management and Global Investment Strategies (The Wiley Finance Series)

Scenarios for Risk Management and Global Investment Strategies......Page 3
Contents......Page 9
Acknowledgements......Page 13
Preface......Page 15
About the authors......Page 21
PART I INVESTMENT STRATEGIES: USING THE KELLY CAPITAL GROWTH CRITERION......Page 23
1 Take a chance......Page 25
Changing a gamble into an investment......Page 28
2 The capital growth theory of investment......Page 31
Blackjack......Page 34
Commodity trading: Investing in the turn of the year effect with Index Futures......Page 35
3 Betting on unpopular lotto numbers using the Kelly criterion......Page 43
4 Good and bad properties of the Kelly criterion......Page 51
How to stay above a given wealth path......Page 59
The various efficient/inefficient market camps: can you beat the stock market?......Page 65
How do investors and consultants do in all these cases?......Page 69
The importance of getting the mean right......Page 72
7 The Great Investors, a way to evaluate them......Page 75
8 The methods and results of managing top US university endowments......Page 85
PART II INVESTMENT STRATEGIES: HEDGE FUNDS......Page 99
9 Hedge fund concepts and a typical convergence trade: Nikkei put warrant risk arbitrage......Page 101
Gamblers as hedge fund managers......Page 104
A typical convergence trade: the Nikkei put warrant market of 1989–90......Page 107
NSA puts and calls on the Toronto and American stock exchanges, 1989–92......Page 108
Derivative disasters......Page 113
The failure of the top hedge fund team ever assembled......Page 117
A week on the wild side......Page 123
Postscript......Page 126
13 The 2006 Amaranth Advisors natural gas hedge fund disaster......Page 133
Background......Page 138
The trade and the rogue trader......Page 139
Is learning possible?......Page 140
Possible utility functions of hedge fund traders......Page 141
Winners and losers......Page 142
PART III TOWARDS SCENARIOS: COUNTRY STUDIES......Page 145
14 Letter from Cairo......Page 147
The challenge in attracting investment......Page 148
Postscript: Riding the petrodollar boom: Is recent growth sustainable?......Page 152
15 Threats, challenges and opportunities of China......Page 153
Costs of development......Page 155
Overseas investment......Page 158
Postscript......Page 164
16 Chinese investment markets: Hedge fund scenario analysis......Page 165
China’s economy......Page 166
Chinese stock markets......Page 167
The share alphabet: Definitions of shares available in mainland Chinese Companies......Page 169
Estimating the returns on the Chinese stock markets: IPOs, ownership and returns......Page 170
How can one participate in this China boom period?......Page 173
The future: Investing in China requires a leap of faith......Page 177
Postscript: Chinese equity markets......Page 178
Postscript on economic growth and development......Page 182
17 Springtime in Buenos Aires: prospects for investment, how deep is the recovery?......Page 183
Devaluation of the Argentine peso......Page 185
Challenges for the financial sector......Page 187
Postscript: The new Kirchner era......Page 190
18 Cyprus: On the outer edge of Europe, in the middle of the Mediterranean......Page 193
US and EU policies towards use of their currencies......Page 194
Cyprus: A model EU student......Page 195
Postscript......Page 197
19 Is Iceland’s growth spurt threatened by financial vulnerabilities?......Page 199
Amid the strengths, there are issues of concern......Page 202
The current account deficit......Page 203
Debt......Page 204
Inflation......Page 205
The currency and interest rates......Page 206
Predicting GDP, recessions and the stock market......Page 209
Will the stock market crash and would it influence other markets?......Page 211
Postscript......Page 214
20 Would a bridge connect Sicily’s economy to Europe’s heart?......Page 217
Sicily’s Economic Challenges......Page 218
Sicily’s ties to the Mediterranean region......Page 220
PART IV SCENARIO ANALYSIS: THE STOCHASTIC PROGRAMMING APPROACH TO MANAGING RISK......Page 223
21 Hedge and pension fund risk, disasters and their prevention......Page 225
Fixed mix and strategic asset allocation......Page 226
Stochastic programming models applied to hedge and pension fund problems......Page 228
InnoALM, The Innovest Austrian Pension Fund Financial Planning Model......Page 230
Extreme scenarios......Page 243
23 Hedge fund scenario analysis......Page 251
The effect of interest rates......Page 252
The 2000–2002 crash in the S&P500......Page 254
The effect of the 2004 presidential election......Page 258
Postscript......Page 262
24 Some approaches for scenario generation and reduction......Page 273
Vector autoregressive models......Page 274
Models to predict relative and absolute asset prices......Page 279
Moment matching......Page 289
The Wasserstein distance minimization approach......Page 295
Planning in advance: stage one of a two period stochastic program......Page 299
How much hedging is there against various risks?......Page 300
Some key markets: crude oil, the S&P500, short and long term interest rates and bond prices......Page 302
Volatility......Page 305
Lessons......Page 306
William Poundstone......Page 309
Closing thoughts......Page 316
Postscript: The Renaissance Medallion Fund......Page 317
Bibliography......Page 321
Index......Page 333