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May 2010

FEATURE
Public Lecture on the Impact of Lehman's Collapse

Dr. Chi-Fu Huang speaks on the impact of Lehman Brother's Swap and Repo Business on Fixed Income Spread Markets..

On April 6, 2010, the NUS Risk Management Institute organized a public seminar titled "Impact of Bankruptcy of Lehman's Swaps and Repo Businesses on Fixed Income Spread Markets" by Dr. Chi-Fu Huang, former J.C. Penn ey Professor of Finance at the Massachusetts Institute of Technology, and Founder and Chairman of Platinum Grove Asset Management (PGAM), a multi-strategy alternative investment management company based in Rye Brook, New York.

At the outset, Dr. Huang stated that without regulators' intervention, filing bankruptcy effectively allowed all of Lehman's counterparties to terminate their over-the-counter (OTC) contracts transacted through Lehman. The collapse resulted in a massive unwinding of matched book positions - those positions for which Lehman acted only as an intermediary between two counterparties without Lehman holding a net position. He further explained that theoretically if both sides of the matched transactions are simultaneously replaced, there would be little impact on the markets as the offsetting replacement transactions are market neutral. However, Dr Huang pointed towards the observed asymmetry in the speed of replacing positions after termination with Lehman and argued that this asymmetry caused the dislocations in the swap and repo markets.



Repo 105: 'True Sales' or Massaging Balance Sheet? 

On March 16, 2010, the U.S. courts released a report by Anton Valukas, the Chairman of Jenner & Block and the court-appointed examiner investigating the bankruptcy of Lehman Brothers. The primary objective of the report is to determine if Lehman's creditors have colorable claims which could be made against parties that may have acted improperly and bear responsibility for Lehman's bankruptcy.

The report alleged that there is sufficient evidence to support two such claims that 1) Certain of Lehman's officers breached their fiduciary duties by exposing the firm to potential liability by filing materially misleading periodic reports and 2) Ernst & Young, the firm's external auditor, was professionally negligent in allowing those reports to go unchallenged. At the root of the misleading reports were transactions known as "Repo 105" and "Repo 108", which had the effect of removing billions of liabilities off Lehman's balance sheets. While these repo instruments differ from the traditional repos only in the amount of collateral posted, their existence and possible misuse have implications, beyond corporate governance, from accounting to legal issues.


Better Mutual Fund Managers

A paper by Dr. Meijun Qian, NUS Business School

In a forthcoming paper "Stale Prices and the Performance Evaluation of Mutual Funds" to be published in the Journal of Financial and Quantitative Analysis, RMI affiliated researcher Dr. Meijun Qian argues that mutual fund or unit trust managers may have better stock picking abilities than what has been previously documented. She finds mis-estimation could be an additional potential reason for low alphas, together with the existing high trading costs and other expenses that are reducing surplus funds returns.

In an open end mutual fund, there is a well known-problem of stale pricing - the fund share prices (NAV) may differ from the true value of the underlying assets. This incongruity occurs because the share prices set by funds at the end of each day are explicitly based on the last price. In case of thinly traded and/or international assets, the last available price could significantly deviate from the underlying asset value. Therefore, the observed returns on mutual fund shares are no longer random. In the absence of randomness in returns, the application of the Capital Asset Pricing Model (CAPM) is likely to generate statistical bias in fund performance evaluation. Furthermore, the returns are now partially predictable. Anyone intentionally or unintentionally trading the mutual fund shares can reap riskless profits due to the return predictability. These profits then manifest as a cost to existing shareholders and dilute the long term fund returns.





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Decomposing the Credit Risk of a Portfolio

March 2010

On March 22, RMI hosted Prof. Yukio Muromachi from the Tokyo Metropolitan University to speak as part of the RMI's Credit Rating Initiative Special Seminar Series.

Prof. Muromachi, whose interests lie in pricing model of the credit risk and evaluation model of a portfolio risk, spoke on the topic of "Decomposing the Credit Risk of a Portfolio into the Individual Assets".



Risk Sharing, Costly Participation, and
Intermediation

April 2010

The first talk during April's RMI Research Workshop was given by Prof. Mark S. Seasholes from Hong Kong University of Science and Technology. He spoke on "Risk Sharing, Costly Participation, and Intermediation".



The Impact of Liquidity on Option Prices

April 2010

Prof. Chung San-Lin of the National Taiwan University gave a talk on "The Impact of Liquidity on Option Prices" as part of RMI Research Workshop Series.




Professional Risk Manager (PRMTM)
Certification Training Program 2010 
20 March - 28 August 2010

Financial Industry Competency Standards (FICS)
June - December 2010

Symposium for Computational Finance
28 - 29 June 2010

IACPM Pre-Conference Workshop
14 July 2010

Fourth Annual Risk Management Conference
15 - 17 July 2010

more




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Published quarterly by Risk Management Institute, NUS
Editor: Ivy Wang (rmiwy@nus.edu.sg)