The Bank of Canada has released a working paper by Fousseni Chabi-Yo and Jun Yang titled Idiosyncratic Coskewness and Equity
Return Anomalies:
In this paper, we show that in a model where investors have heterogeneous preferences, the expected return of risky assets depends on the idiosyncratic coskewness beta, which measures the co-movement of the individual stock variance and the market return. We find that there is a negative (positive) relation between idiosyncratic coskewness and equity returns when idiosyncratic coskewness betas are positive (negative). Standard risk factors, such as the market, size, book-to-market, and momentum cannot explain the findings. We construct two idiosyncratic coskewness factors to capture the market-wide effect of idiosyncratic coskewness. The two idiosyncratic coskewness factors can also explain the negative and significant relation between the maximum daily return over the past one month (MAX) and expected stock returns documented in Bali, Cakici, and Whitelaw (2009). In addition, when we control for these two idiosyncratic coskewness factors, the return difference for distress-sorted portfolios found in Campbell, Hilscher, and Szilagyi (2008) becomes insignificant. Furthermore, the two idiosyncratic coskewness factors help us understand the idiosyncratic volatility puzzle found in Ang, Hodrick, Xing, and Zhang (2006). They reduce the return difference between portfolios with the smallest and largest idiosyncratic volatility by more than 60%, although the difference is still statistically significant.
Cuomo’s suing Ivy Management, a unit of BONY-Mellon:
The damaging information that Ivy discovered about Madoff and then failed to disclose includes:
In 1997, Ivy learned that there were not enough options to support Madoff’s purported trading strategy.
- Specifically, the volume of Standard and Poor’s 100 Index options (“OEX”) available would only support half of the amount of assets Ivy believed Madoff had under management. This strongly suggested that the trades Madoff had been reporting were not actually being made.
- Between 1997 and 1998, Madoff gave Ivy three vastly different explanations as to where and with whom he traded OEX options, all of which were inconsistent with Ivy’s observations and understanding of OEX options.
- Ivy received information from industry contacts indicating that Madoff was misusing client assets to fund his broker-dealer business instead of investing the money as he claimed he was doing.
…
Internal e-mails reveal that [former Chief Executive Officer Lawrence] Simon and [former Chief Investment Officer Howard] Wohl intentionally failed to disclose their doubts about Madoff to their clients with heavy Madoff-related investments:On December 16, 1998, the day after Madoff gave Ivy his third explanation about his option trades, Wohl recommended to Simon that Ivy withdraw all of the funds they personally managed from Madoff, including some of their own money, writing:
- “I’m concerned that he [Madoff] now admits that he does not execute all of the index options on the exchange that there are ‘unknown’ counterparties that if these options are not paid off he’d lose less than 100%. It remains a matter of faith based on great performance – this doesn’t justify any investment, let alone 3%.”
- In response, Simon argued that Ivy should not withdraw the investment it had placed with Madoff because that could lead Ivy’s clients to withdraw their money from Madoff as well, which would significantly impact their total revenue, writing: “Amount we now have with Bernie in Ivy’s partnerships is probably less than $5 million. The bigger issue is the 190 mil or so that our relationships have with him which leads to two problems, we are on the legal hook in almost all of the relationships and the fees generated are estimated based on 17+% returns …. [to be] $1.275 Million… Are we prepared to take all the chips off the table, have assets decrease by over $300 million and our overall fees reduced by $1.6 million or more, and, one wonders if we ever “escape” the legal issue of being the asset allocator and introducer, even if we terminate all Madoff related relationships?”
Just like with SocGen, Barings and just about every other fraud: willful blindness.
To my astonishment, Trichet actually gave a thoughtful speech, titled What role for finance?, although his premises do not support his conclusions:
Sellers of securitised products must disclose all information about the underlying loan structure so that both investors and rating agencies can correctly price the risks embedded in these products. More transparency can also be achieved by central counterparty clearing of bilateral over-the-counter trading arrangements.
There was lots of transparency in the sub-prime market; it just wasn’t used and – in some cases – the math was wrong. Additionally, firms were hired as collateral managers on the basis of – as far as I can tell – complete lack of managerial skill. Come on, people. The sell-side has no brains at all – they’re not paid to have brains, they’re paid to have bright smiles and firm handshakes while telling clients how astute they are. Give me a break. Fortunately, however, the buy-side isn’t presenting much of a challenge:
JPMorgan Chase & Co.’s traders matched those at Goldman Sachs Group Inc. in making money every day of the first quarter, a first for both companies.
Bank of America did the same:
During the three months ended March 31, 2010, positive trading-related revenue was recorded for 100 percent of the trading days of which 95 percent were daily trading gains of over $25 million. This compares to the three months ended December 31, 2009, where positive trading-related revenue was recorded for 86 percent of the trading days of which 58 percent were daily trading gains of over $25 million, 10 percent of the trading days had losses greater than $25 million and the largest loss was $90 million.
Back to Trichet:
For instance, investors are currently allowed to buy credit defaults swaps without holding the underlying asset, typically a bond. By first buying the credit default swaps and then trying to affect market sentiment by going short on the underlying bond, investors can make large profits without a change in the fundamental value of the reference entity and, worse, to its detriment.
If there is truly no change in the fundamental value of the reference entity, then there will be plenty of people stepping up to buy it cheaply. This is merely a problem of liquidity.
I commented yesterday that the EU bail-out was only a stop-gap the relies on future reforms; Bernanke agrees:
Federal Reserve Chairman Ben S. Bernanke told U.S. senators today that the euro region’s almost $1 trillion aid package to stem its debt crisis isn’t a cure- all, according to a participant.
“He said, ‘This is basically not a panacea,’” and that the measures are “temporary,” Alabama Senator Richard Shelby, the senior Republican on the Banking Committee, told reporters in Washington after a closed-door briefing Bernanke held with the panel. “There’s got to be fundamental underlying changes in their economies, not just Greece, but a lot of other countries,” Shelby cited Bernanke as saying.
The Canadian preferred share market continued recent trends today, with PerpetualDiscounts losing 10bp while FixedResets gained 10bp. Volume returned to heavy levels. There was quite a bit of volatility.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 2.62 % | 2.77 % | 44,678 | 20.87 | 1 | -1.4214 % | 2,112.6 |
| FixedFloater | 5.00 % | 3.07 % | 42,647 | 20.26 | 1 | 1.0228 % | 3,198.2 |
| Floater | 2.08 % | 2.33 % | 103,420 | 21.51 | 3 | -0.2105 % | 2,339.6 |
| OpRet | 4.92 % | 4.24 % | 91,418 | 2.97 | 11 | -0.0464 % | 2,292.9 |
| SplitShare | 6.49 % | 6.83 % | 126,763 | 3.53 | 2 | 0.0224 % | 2,101.3 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0464 % | 2,096.6 |
| Perpetual-Premium | 5.53 % | 4.77 % | 22,814 | 15.83 | 1 | 0.0000 % | 1,824.2 |
| Perpetual-Discount | 6.32 % | 6.39 % | 216,909 | 13.32 | 77 | -0.1030 % | 1,689.4 |
| FixedReset | 5.53 % | 4.38 % | 517,296 | 3.58 | 44 | 0.0985 % | 2,143.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IAG.PR.F | Perpetual-Discount | -2.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 22.39 Evaluated at bid price : 22.50 Bid-YTW : 6.71 % |
| IAG.PR.A | Perpetual-Discount | -2.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 17.61 Evaluated at bid price : 17.61 Bid-YTW : 6.64 % |
| IGM.PR.B | Perpetual-Discount | -1.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 22.69 Evaluated at bid price : 22.82 Bid-YTW : 6.52 % |
| BAM.PR.E | Ratchet | -1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 22.87 Evaluated at bid price : 21.50 Bid-YTW : 2.77 % |
| PWF.PR.E | Perpetual-Discount | -1.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 20.97 Evaluated at bid price : 20.97 Bid-YTW : 6.63 % |
| ELF.PR.F | Perpetual-Discount | -1.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 18.41 Evaluated at bid price : 18.41 Bid-YTW : 7.30 % |
| PWF.PR.G | Perpetual-Discount | -1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 21.95 Evaluated at bid price : 22.35 Bid-YTW : 6.65 % |
| HSB.PR.C | Perpetual-Discount | -1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 20.02 Evaluated at bid price : 20.02 Bid-YTW : 6.47 % |
| GWO.PR.J | FixedReset | 1.02 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 4.21 % |
| BAM.PR.G | FixedFloater | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 25.00 Evaluated at bid price : 21.73 Bid-YTW : 3.07 % |
| BNS.PR.N | Perpetual-Discount | 1.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 6.17 % |
| GWO.PR.F | Perpetual-Discount | 1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 22.89 Evaluated at bid price : 23.15 Bid-YTW : 6.46 % |
| PWF.PR.O | Perpetual-Discount | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 22.37 Evaluated at bid price : 22.48 Bid-YTW : 6.51 % |
| RY.PR.R | FixedReset | 1.36 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.91 Bid-YTW : 4.11 % |
| GWO.PR.M | Perpetual-Discount | 1.53 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 23.10 Evaluated at bid price : 23.25 Bid-YTW : 6.37 % |
| MFC.PR.C | Perpetual-Discount | 2.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 18.30 Evaluated at bid price : 18.30 Bid-YTW : 6.26 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.P | FixedReset | 102,724 | RBC crossed blocks of 10,000 and 40,000 at 26.30. RBC sold 20,000 to Nesbitt at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-03-27 Maturity Price : 25.00 Evaluated at bid price : 26.23 Bid-YTW : 4.23 % |
| TRP.PR.A | FixedReset | 89,014 | TD crossed 24,800 at 25.25; RBC crossed 40,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 4.51 % |
| CM.PR.G | Perpetual-Discount | 67,350 | National bought 10,000 from Scotia at 21.05. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 21.05 Evaluated at bid price : 21.05 Bid-YTW : 6.48 % |
| RY.PR.R | FixedReset | 54,313 | Nesbitt crossed 40,000 at 26.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.91 Bid-YTW : 4.11 % |
| PWF.PR.D | OpRet | 50,000 | RBC crossed two blocks of 25,000 each at 25.71. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2012-10-30 Maturity Price : 25.00 Evaluated at bid price : 25.54 Bid-YTW : 4.36 % |
| BAM.PR.B | Floater | 47,839 | Nesbitt crossed 25,000 at 17.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-05-11 Maturity Price : 16.85 Evaluated at bid price : 16.85 Bid-YTW : 2.35 % |
| There were 51 other index-included issues trading in excess of 10,000 shares. | |||