Bruce Jacobs and Kenneth Levy
Equity Management: The Art and Science of Modern Quantitative Investing, Second Edition
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# Equity Management: The Art and Science of Modern Quantitative Investing, Second Edition

2^{nd} Edition

By Bruce Jacobs and Kenneth Levy

Copyright: 2017

Copyright: 2017

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The estimated amount of time this product will be on the market is based on a number of factors, including faculty input to instructional design and the prior revision cycle and updates to academic research-which typically results in a revision cycle ranging from every two to four years for this product. Pricing subject to change at any time.

The estimated amount of time this product will be on the market is based on a number of factors, including faculty input to instructional design and the prior revision cycle and updates to academic research-which typically results in a revision cycle ranging from every two to four years for this product. Pricing subject to change at any time.

Foreword to First Edition by Harry M. Markowitz, Nobel Laureate

Foreword to Second Edition by Harry M. Markowitz, Nobel Laureate

Preface

Acknowledgments

INTRODUCTION

Our Approach to Quantitative Investing

PART ONE

Profiting in a Multidimensional, Dynamic World

Chapter 1

Ten Investment Insights that Matter

The Stock Market Is a Complex System

Market Complexity Can be Exploited with a Rich, Multidimensional Model

Return-Predictor Relationships Should Be Disentangled

An Investment Firm Should Abide By the Law of One Alpha

The Investment Process Should Be Dynamic and Transparent

A Customized, Integrated Investment Process Preserves Insights

Integrated Long-Short Optimization Can Provide Enhanced Returns and Risk Control for Market-Neutral and 130-30 Portfolios

Alpha from Security Selection Can Be Transported to Any Asset Class

Portfolio Optimization Should Take into Account an Investor’s Aversion to Leverage

Beware of Risk Shifting, Free Lunches, and Irrational Markets

Conclusion

Chapter 2

The Complexity of the Stock Market

The Evolution of Investment Practice

Web of Return Regularities

Disentangling and Purifying Returns

Advantages of Disentangling

Evidence of Inefficiency

Value Modeling in an Inefficient Market

Risk Modeling versus Return Modeling

Pure Return Effects

Anomalous Pockets of Inefficiency

Empirical Return Regularities

Modeling Empirical Return Regularities

Bayesian Random Walk Forecasting

Conclusion

Chapter 3

Disentangling Equity Return Regularities: New Insights and Investment Opportunities

Previous Research

Return Regularities We Consider

Methodology

The Results on Return Regularities

P/E and Size Effects

Yield, Neglect, Price, and Risk

Trends and Reversals

Some Implications

January versus Rest-of-Year Returns

Autocorrelation of Return Regularities

Return Regularities and Their Macroeconomic Linkages

Conclusion

Chapter 4

On the Value of ‘Value’

Value and Equity Attributes

Market Psychology, Value, and Equity Attributes

The Importance of Equity Attributes

Examining the DDM

Methodology

Stability of Equity Attributes

Expected Returns

Naïve Expected Returns

Pure Expected Returns

Actual Returns

Power of the DDM

Power of Equity Attributes

Forecasting DDM Returns

Conclusion

Chapter 5

Calendar Anomalies: Abnormal Returns at Calendar Turning Points

The January Effect

Rationales

The Turn-of-the-Month Effect

The Day-of-the-Week Effect

Rationales

The Holiday Effect

The Time-of-Day Effect

Conclusion

Chapter 6

Forecasting the Size Effect

The Size Effect

Size and Transaction Costs

Size and Risk Measurement

Size and Risk Premiums

Size and Other Cross-Sectional Effects

Size and Calendar Effects

Modeling the Size Effect

Simple Extrapolation Techniques

Time-Series Techniques

Transfer Functions

Vector Time-Series Models

Structural Macroeconomic Models

Bayesian Vector Time-Series Models

Chapter 7

Earnings Estimates, Predictor Specification, and Measurement Error

Predictor Specification and Measurement Error

Alternative Specifications of E/P and Earnings Trend for Screening

Alternative Specifications of E/P and Trend for Modeling Returns

Predictor Specification with Missing Values

Predictor Specification and Analyst Coverage

The Return-Predictor Relationship and Analyst Coverage

Summary

PART TWO

Managing Portfolios in a Multidimensional, Dynamic World

Chapter 8

Engineering Portfolios: A Unified Approach

Is the Market Segmented or Unified?

A Unified Model

A Common Evaluation Framework

Portfolio Construction and Evaluation

Engineering ‘Benchmark’ Strategies

Added Flexibility

Economies

Chapter 9

The Law of One Alpha

Chapter 10

Residual Risk: How Much Is Too Much?

Beyond the Curtain

Some Implications

Chapter 11

High-Definition Style Rotation

High-Definition Style

Pure Style Returns

Implications

High-Definition Management

Benefits of High-Definition Style

Chapter 12

Smart Beta versus Smart Alpha

Supported By Theory?

Active or Passive?

Forward-Looking and Dynamic?

Concentrated Risk Exposures?

Unintended Risk Exposures?

Factor Integration and Risk Control?

Turnover Levels?

Liquidity and Overcrowding?

Transparent or Proprietary?

Conclusion

Chapter 13

Smart Beta: Too Good To Be True?

Smart Beta Portfolios are Passive

Smart Beta Targets the Most Significant Return-Generating Factors

Smart Beta Portfolios are Well Diversified

Smart Beta Factors Perform Consistently

Smart Beta Portfolios Benefit from Mean-Reversion in Prices

Smart Beta Portfolios Can be Efficiently Combined

Smart Beta Benefits from Transparency

Smart Beta has Nearly Unlimited Capacity

Smart Beta Streamlines the Investment Decision Process for Investors

Smart Beta Costs Less than Active Investing

Conclusion

Chapter 14

Is Smart Beta State of the Art?

Chapter 15

Investing in a Multidimensional Market

The Market’s Multidimensionality

Advantages of a Multidimensional Approach

Conclusion

PART THREE

Expanding Opportunities with Market-Neutral Long-Short Portfolios

Chapter 16

Long-Short Equity Investing

Long-Short Equity Strategies

Societal Advantages of Short-Selling

Equilibrium Models, Short-Selling, and Security Prices

Practical Benefits of Long-Short Investing

Portfolio Payoff Patterns

Long-Short Mechanics and Returns

Theoretical Tracking Error

Advantages of the Market-Neutral Strategy over Long Manager plus Short Manager

Advantages of the Equitized Strategy over Traditional Long Equity Management

Implementation of Long-Short Strategies: Quantitative versus Judgmental

Implementation of Long-Short Strategies: Portfolio Construction Alternatives

Practical Issues and Concerns

Shorting Issues

Trading Issues

Custody Issues

Legal Issues

Morality Issues

What Asset Class Is Long-Short?

Conclusion

Chapter 17

20 Myths About Long-Short

Chapter 18

The Long and Short on Long-Short

Building a Market-Neutral Portfolio

A Question of Efficiency

Benefits of Long-Short

Equitizing Long-Short

Trading Long-Short

Evaluating Long-Short

Chapter 19

Long-Short Portfolio Management: An Integrated Approach

Long-Short: Benefits and Costs

The Real Benefits of Long-Short

Costs: Perception versus Reality

The Optimal Portfolio

Neutral Portfolios

Optimal Equitization

Conclusion

Chapter 20

Alpha Transport with Derivatives

Asset Allocation or Security Selection

Asset Allocation and Security Selection

Transporter Malfunctions

Matter-Antimatter Warp Drive

To Boldly Go

PART FOUR

Expanding Opportunities with Enhanced Active 130-30 Portfolios

Chapter 21

Enhanced Active Equity Strategies: Relaxing the Long-Only Constraint in the Pursuit of Active Return

Approaches to Equity Management

Enhanced Active Equity Portfolios

Performance: An Illustration

The Enhanced Prime Brokerage Structure

Operational Considerations

Comparison to Other Long-Short Strategies

Conclusion

Appendix: Weighted-Average Capitalization Weights

Chapter 22

20 Myths About Enhanced Active 120-20 Strategies

Chapter 23

Enhanced Active Equity Portfolios Are Trim Equitized Long-Short Portfolios

Market-Neutral, Equitized, and Enhanced Active Portfolios

Trimming an Equitized Portfolio

Enhanced Active versus Equitized Portfolios

Benchmark Index Choices

Conclusion

Chapter 24

On the Optimality of Long-Short Strategies

Portfolio Construction and Problem Formulation

Optimal Long-Short Portfolios

Optimality of Dollar Neutrality

Optimality of Beta Neutrality

Optimal Long-Short Portfolio with Minimum Residual Risk

Optimal Long-Short Portfolio with Specified Residual Risk

Optimal Equitized Long-Short Portfolio

Optimality of Dollar Neutrality with Equitization

Optimality of Beta Neutrality with Equitization

Optimal Equitized Long-Short Portfolio with Specified Residual Risk

Optimal Equitized Long-Short Portfolio with Constrained Beta

Conclusion

PART FIVE

Optimizing Portfolios with Short Positions

Chapter 25

Trimability and Fast Optimization of Long-Short Portfolios

General Mean-Variance Problem

Long-Short Constraints in Practice

Diagonalized Models of Covariance

Factor Models

Scenario Models

Historical Covariance Models

Modeling Long-Short Portfolios

Applying Fast Techniques to the Long-Short Model

Trimability

Consequences of Trimability

Example

Summary

Chapter 26

Portfolio Optimization with Factors, Scenarios, and Realistic Short Positions

The General Mean-Variance Problem

Solution to the General Problem

Diagonalizable Models of Covariance

Factor Models

Scenario Models

Historical Covariance Matrices

Short Sales in Practice

Modeling Short Sales

Solution to Long-Short Model

Example

Summary

PART SIX

Optimizing Portfolios for Leverage-Averse Investors

Chapter 27

Leverage Aversion and Portfolio Optimality

Optimal Enhancement with Leverage Aversion

An Example with Leverage Aversion

Conclusion

Chapter 28

Leverage Aversion, Efficient Frontiers, and the Efficient Region

Specifying the Leverage-Aversion Term

Specification of the Leverage-Aversion Term Using Portfolio Total Volatility

Optimal Portfolios with Leverage-Aversion Based on Portfolio Total Volatility

Efficient Frontiers With and Without Leverage Aversion

Efficient Frontiers for Various Leverage-Tolerance Cases

The Efficient Region

Conclusion

Appendix: Comparison of the Enhancement Surfaces Using Two Different Specifications

Chapter 29

Introducing Leverage Aversion into Portfolio Theory and Practice

Chapter 30

A Comparison of the Mean-Variance-Leverage Optimization Model and the Markowitz General Mean-Variance Portfolio Selection Model

Leverage Risk—A Third Dimension

Quartic versus Quadratic Optimization

Practical Insights from the MVL Optimization Model

Conclusion

Chapter 31

Traditional Optimization is Not Optimal for Leverage-Averse Investors

Mean-Variance Optimization with a Leverage Constraint

The Leverage-Averse Investor’s Utility of Optimal Mean-Variance Portfolios

Mean-Variance-Leverage Optimization versus Leverage-Constrained Mean-Variance Optimization

Conclusion

Chapter 32

The Unique Risks of Portfolio Leverage: Why Modern Portfolio Theory Fails and How to Fix It

The Limitations of Mean-Variance Optimization

Mean-Variance Optimization with Leverage Constraints

Mean-Variance-Leverage Optimization

Optimal Mean-Variance-Leverage Portfolios and Efficient Frontiers

The Mean-Variance-Leverage Efficient Region

The Mean-Variance-Leverage Efficient Surface

Optimal Mean-Variance-Leverage Portfolios versus Optimal Mean-Variance Portfolios

Volatility and Leverage in Real-Life Situations

Conclusion

PART SEVEN

Shifting Risk Can Lead to Financial Crises

Chapter 33

Option Pricing Theory and its Unintended Consequences

Chapter 34

When Seemingly Infallible Arbitrage Strategies Fail

Chapter 35

Momentum Trading: The New Alchemy

Chapter 36

Risk Avoidance and Market Fragility

Insuring Specific versus Systematic Risk

Insurance and Systemic Risk

Risk Sharing versus Risk Shifting

Chapter 37

Tumbling Tower of Babel: Subprime Securitization and the Credit Crisis

Risk-Shifting Building Blocks

RMBSs

ABCP, SIVs, and CDOs

CDSs

What Goes Up…

The Rise of Subprime

Low Risk for Sellers and Buyers

High Risk for the System

…Must Come Down

Positive Feedback’s Negative Consequences

Fault Lines

Conclusion: Building From the Ruins

PART EIGHT

Simulating Security Markets

Chapter 38

Financial Market Simulation

Types of Dynamic Models

JLM Simulator

Status

Events

Initialization

Reoptimization

Order Review

End of Day

Objectives and Extensions

Alternative Investor and Trader Behaviors

Model Size

Advantages of Asynchronous Finance Models

Caveat

Conclusion

Chapter 39

Simulating Security Markets in Dynamic and Equilibrium Modes

Simulation Overview

Dynamic Analysis

Different Initial Random Seeds

Different Ratios of Momentum to Value Investors

Trading and Anchoring Rules

Trading rules

Anchoring rules

Capital Market Equilibrium

Expected Return Estimation Method

Case Study

Conclusion

Index

Foreword to First Edition by Harry M. Markowitz, Nobel Laureate

Foreword to Second Edition by Harry M. Markowitz, Nobel Laureate

Preface

Acknowledgments

INTRODUCTION

Our Approach to Quantitative Investing

PART ONE

Profiting in a Multidimensional, Dynamic World

Chapter 1

Ten Investment Insights that Matter

The Stock Market Is a Complex System

Market Complexity Can be Exploited with a Rich, Multidimensional Model

Return-Predictor Relationships Should Be Disentangled

An Investment Firm Should Abide By the Law of One Alpha

The Investment Process Should Be Dynamic and Transparent

A Customized, Integrated Investment Process Preserves Insights

Integrated Long-Short Optimization Can Provide Enhanced Returns and Risk Control for Market-Neutral and 130-30 Portfolios

Alpha from Security Selection Can Be Transported to Any Asset Class

Portfolio Optimization Should Take into Account an Investor’s Aversion to Leverage

Beware of Risk Shifting, Free Lunches, and Irrational Markets

Conclusion

Chapter 2

The Complexity of the Stock Market

The Evolution of Investment Practice

Web of Return Regularities

Disentangling and Purifying Returns

Advantages of Disentangling

Evidence of Inefficiency

Value Modeling in an Inefficient Market

Risk Modeling versus Return Modeling

Pure Return Effects

Anomalous Pockets of Inefficiency

Empirical Return Regularities

Modeling Empirical Return Regularities

Bayesian Random Walk Forecasting

Conclusion

Chapter 3

Disentangling Equity Return Regularities: New Insights and Investment Opportunities

Previous Research

Return Regularities We Consider

Methodology

The Results on Return Regularities

P/E and Size Effects

Yield, Neglect, Price, and Risk

Trends and Reversals

Some Implications

January versus Rest-of-Year Returns

Autocorrelation of Return Regularities

Return Regularities and Their Macroeconomic Linkages

Conclusion

Chapter 4

On the Value of ‘Value’

Value and Equity Attributes

Market Psychology, Value, and Equity Attributes

The Importance of Equity Attributes

Examining the DDM

Methodology

Stability of Equity Attributes

Expected Returns

Naïve Expected Returns

Pure Expected Returns

Actual Returns

Power of the DDM

Power of Equity Attributes

Forecasting DDM Returns

Conclusion

Chapter 5

Calendar Anomalies: Abnormal Returns at Calendar Turning Points

The January Effect

Rationales

The Turn-of-the-Month Effect

The Day-of-the-Week Effect

Rationales

The Holiday Effect

The Time-of-Day Effect

Conclusion

Chapter 6

Forecasting the Size Effect

The Size Effect

Size and Transaction Costs

Size and Risk Measurement

Size and Risk Premiums

Size and Other Cross-Sectional Effects

Size and Calendar Effects

Modeling the Size Effect

Simple Extrapolation Techniques

Time-Series Techniques

Transfer Functions

Vector Time-Series Models

Structural Macroeconomic Models

Bayesian Vector Time-Series Models

Chapter 7

Earnings Estimates, Predictor Specification, and Measurement Error

Predictor Specification and Measurement Error

Alternative Specifications of E/P and Earnings Trend for Screening

Alternative Specifications of E/P and Trend for Modeling Returns

Predictor Specification with Missing Values

Predictor Specification and Analyst Coverage

The Return-Predictor Relationship and Analyst Coverage

Summary

PART TWO

Managing Portfolios in a Multidimensional, Dynamic World

Chapter 8

Engineering Portfolios: A Unified Approach

Is the Market Segmented or Unified?

A Unified Model

A Common Evaluation Framework

Portfolio Construction and Evaluation

Engineering ‘Benchmark’ Strategies

Added Flexibility

Economies

Chapter 9

The Law of One Alpha

Chapter 10

Residual Risk: How Much Is Too Much?

Beyond the Curtain

Some Implications

Chapter 11

High-Definition Style Rotation

High-Definition Style

Pure Style Returns

Implications

High-Definition Management

Benefits of High-Definition Style

Chapter 12

Smart Beta versus Smart Alpha

Supported By Theory?

Active or Passive?

Forward-Looking and Dynamic?

Concentrated Risk Exposures?

Unintended Risk Exposures?

Factor Integration and Risk Control?

Turnover Levels?

Liquidity and Overcrowding?

Transparent or Proprietary?

Conclusion

Chapter 13

Smart Beta: Too Good To Be True?

Smart Beta Portfolios are Passive

Smart Beta Targets the Most Significant Return-Generating Factors

Smart Beta Portfolios are Well Diversified

Smart Beta Factors Perform Consistently

Smart Beta Portfolios Benefit from Mean-Reversion in Prices

Smart Beta Portfolios Can be Efficiently Combined

Smart Beta Benefits from Transparency

Smart Beta has Nearly Unlimited Capacity

Smart Beta Streamlines the Investment Decision Process for Investors

Smart Beta Costs Less than Active Investing

Conclusion

Chapter 14

Is Smart Beta State of the Art?

Chapter 15

Investing in a Multidimensional Market

The Market’s Multidimensionality

Advantages of a Multidimensional Approach

Conclusion

PART THREE

Expanding Opportunities with Market-Neutral Long-Short Portfolios

Chapter 16

Long-Short Equity Investing

Long-Short Equity Strategies

Societal Advantages of Short-Selling

Equilibrium Models, Short-Selling, and Security Prices

Practical Benefits of Long-Short Investing

Portfolio Payoff Patterns

Long-Short Mechanics and Returns

Theoretical Tracking Error

Advantages of the Market-Neutral Strategy over Long Manager plus Short Manager

Advantages of the Equitized Strategy over Traditional Long Equity Management

Implementation of Long-Short Strategies: Quantitative versus Judgmental

Implementation of Long-Short Strategies: Portfolio Construction Alternatives

Practical Issues and Concerns

Shorting Issues

Trading Issues

Custody Issues

Legal Issues

Morality Issues

What Asset Class Is Long-Short?

Conclusion

Chapter 17

20 Myths About Long-Short

Chapter 18

The Long and Short on Long-Short

Building a Market-Neutral Portfolio

A Question of Efficiency

Benefits of Long-Short

Equitizing Long-Short

Trading Long-Short

Evaluating Long-Short

Chapter 19

Long-Short Portfolio Management: An Integrated Approach

Long-Short: Benefits and Costs

The Real Benefits of Long-Short

Costs: Perception versus Reality

The Optimal Portfolio

Neutral Portfolios

Optimal Equitization

Conclusion

Chapter 20

Alpha Transport with Derivatives

Asset Allocation or Security Selection

Asset Allocation and Security Selection

Transporter Malfunctions

Matter-Antimatter Warp Drive

To Boldly Go

PART FOUR

Expanding Opportunities with Enhanced Active 130-30 Portfolios

Chapter 21

Enhanced Active Equity Strategies: Relaxing the Long-Only Constraint in the Pursuit of Active Return

Approaches to Equity Management

Enhanced Active Equity Portfolios

Performance: An Illustration

The Enhanced Prime Brokerage Structure

Operational Considerations

Comparison to Other Long-Short Strategies

Conclusion

Appendix: Weighted-Average Capitalization Weights

Chapter 22

20 Myths About Enhanced Active 120-20 Strategies

Chapter 23

Enhanced Active Equity Portfolios Are Trim Equitized Long-Short Portfolios

Market-Neutral, Equitized, and Enhanced Active Portfolios

Trimming an Equitized Portfolio

Enhanced Active versus Equitized Portfolios

Benchmark Index Choices

Conclusion

Chapter 24

On the Optimality of Long-Short Strategies

Portfolio Construction and Problem Formulation

Optimal Long-Short Portfolios

Optimality of Dollar Neutrality

Optimality of Beta Neutrality

Optimal Long-Short Portfolio with Minimum Residual Risk

Optimal Long-Short Portfolio with Specified Residual Risk

Optimal Equitized Long-Short Portfolio

Optimality of Dollar Neutrality with Equitization

Optimality of Beta Neutrality with Equitization

Optimal Equitized Long-Short Portfolio with Specified Residual Risk

Optimal Equitized Long-Short Portfolio with Constrained Beta

Conclusion

PART FIVE

Optimizing Portfolios with Short Positions

Chapter 25

Trimability and Fast Optimization of Long-Short Portfolios

General Mean-Variance Problem

Long-Short Constraints in Practice

Diagonalized Models of Covariance

Factor Models

Scenario Models

Historical Covariance Models

Modeling Long-Short Portfolios

Applying Fast Techniques to the Long-Short Model

Trimability

Consequences of Trimability

Example

Summary

Chapter 26

Portfolio Optimization with Factors, Scenarios, and Realistic Short Positions

The General Mean-Variance Problem

Solution to the General Problem

Diagonalizable Models of Covariance

Factor Models

Scenario Models

Historical Covariance Matrices

Short Sales in Practice

Modeling Short Sales

Solution to Long-Short Model

Example

Summary

PART SIX

Optimizing Portfolios for Leverage-Averse Investors

Chapter 27

Leverage Aversion and Portfolio Optimality

Optimal Enhancement with Leverage Aversion

An Example with Leverage Aversion

Conclusion

Chapter 28

Leverage Aversion, Efficient Frontiers, and the Efficient Region

Specifying the Leverage-Aversion Term

Specification of the Leverage-Aversion Term Using Portfolio Total Volatility

Optimal Portfolios with Leverage-Aversion Based on Portfolio Total Volatility

Efficient Frontiers With and Without Leverage Aversion

Efficient Frontiers for Various Leverage-Tolerance Cases

The Efficient Region

Conclusion

Appendix: Comparison of the Enhancement Surfaces Using Two Different Specifications

Chapter 29

Introducing Leverage Aversion into Portfolio Theory and Practice

Chapter 30

A Comparison of the Mean-Variance-Leverage Optimization Model and the Markowitz General Mean-Variance Portfolio Selection Model

Leverage Risk—A Third Dimension

Quartic versus Quadratic Optimization

Practical Insights from the MVL Optimization Model

Conclusion

Chapter 31

Traditional Optimization is Not Optimal for Leverage-Averse Investors

Mean-Variance Optimization with a Leverage Constraint

The Leverage-Averse Investor’s Utility of Optimal Mean-Variance Portfolios

Mean-Variance-Leverage Optimization versus Leverage-Constrained Mean-Variance Optimization

Conclusion

Chapter 32

The Unique Risks of Portfolio Leverage: Why Modern Portfolio Theory Fails and How to Fix It

The Limitations of Mean-Variance Optimization

Mean-Variance Optimization with Leverage Constraints

Mean-Variance-Leverage Optimization

Optimal Mean-Variance-Leverage Portfolios and Efficient Frontiers

The Mean-Variance-Leverage Efficient Region

The Mean-Variance-Leverage Efficient Surface

Optimal Mean-Variance-Leverage Portfolios versus Optimal Mean-Variance Portfolios

Volatility and Leverage in Real-Life Situations

Conclusion

PART SEVEN

Shifting Risk Can Lead to Financial Crises

Chapter 33

Option Pricing Theory and its Unintended Consequences

Chapter 34

When Seemingly Infallible Arbitrage Strategies Fail

Chapter 35

Momentum Trading: The New Alchemy

Chapter 36

Risk Avoidance and Market Fragility

Insuring Specific versus Systematic Risk

Insurance and Systemic Risk

Risk Sharing versus Risk Shifting

Chapter 37

Tumbling Tower of Babel: Subprime Securitization and the Credit Crisis

Risk-Shifting Building Blocks

RMBSs

ABCP, SIVs, and CDOs

CDSs

What Goes Up…

The Rise of Subprime

Low Risk for Sellers and Buyers

High Risk for the System

…Must Come Down

Positive Feedback’s Negative Consequences

Fault Lines

Conclusion: Building From the Ruins

PART EIGHT

Simulating Security Markets

Chapter 38

Financial Market Simulation

Types of Dynamic Models

JLM Simulator

Status

Events

Initialization

Reoptimization

Order Review

End of Day

Objectives and Extensions

Alternative Investor and Trader Behaviors

Model Size

Advantages of Asynchronous Finance Models

Caveat

Conclusion

Chapter 39

Simulating Security Markets in Dynamic and Equilibrium Modes

Simulation Overview

Dynamic Analysis

Different Initial Random Seeds

Different Ratios of Momentum to Value Investors

Trading and Anchoring Rules

Trading rules

Anchoring rules

Capital Market Equilibrium

Expected Return Estimation Method

Case Study

Conclusion

Index

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