Wall Street
Trading
activity and price volatility in the municipal bond market, by Chris Downing
and Frank Zhang, Journal of Finance, April 2004. Many traders
in the municipal bond market expect a positive correlation between size of
transaction and price volatility. This study finds the opposite to be the
case. Price volatility is positively correlated with the number of
transactions observed over a week. The article goes on to discuss important
questions about what drives trades to market and the degree to which movements
in related markets might explain the arrival of trades in the municipal
markets.
Equity
portfolio construction: proceedings of an AIMR seminar in March
2002. Many AIMR seminars are excellent, but I
found this one especially informative and provocative. Harold Bradley’s “Views
of an ‘Informed’ trader” makes you sit up and take notice
from his observations on the impact of electronic trading markets on
traditional trading houses, transactions costs, and the future of research.
Richard Ennis’s paper on “Reintegrating the equity portfolio” contends
that to the extent skill exists, it is not localized. Once we accept
that notion, the whole question of selecting managers and manager diversification
appears in a new light. Important stuff. Two papers dealing directly
with portfolio construction – Mark Kritzman on “Innovations
in risk management” and Ron Kahn on “What sponsors need for
their active equity managers” both hold out hope for active management
but only in terms of managing the risks of active management. I rank
these two papers among the highest I have ever read anywhere.
Warnings
from the Enron Message Board, by James Felton and Jonchai Kim,
The Journal of Investing, Fall 2002. This is
an ingenious piece of work, covering several years of internal anonymous
internet communications among Enron employees. The rot at the core
of this company early on was no secret to the participants.
