Frontmatter Page xi Monday, March 8, 2004 10:06 AM
Contents xiDynamic Market Models of Returns 537
Estimation of State-Space Models 538
Dynamic Models for Prices 538
Estimation and Testing of Cointegrated Systems 543
Cointegration and Financial Time Series 544
Nonlinear Dynamic Models for Prices and Returns 546
Summary 549
CHAPTER 19
Equity Portfolio Management 551
Integrating the Equity Portfolio Management Process 551
Active versus Passive Portfolio Management 552
Tracking Error 553
Backward-Looking versus Forward-Looking Tracking Error 555
The Impact of Portfolio Size, Benchmark Volatility, and
Portfolio Beta on Tracking Error 556
Equity Style Management 560
Types of Equity Styles 560
Style Classification Systems 562
Passive Strategies 564
Constructing an Indexed Portfolio 564
Index Tracking and Cointegration 565
Active Investing 566
Top-Down Approaches to Active Investing 566
Bottom-Up Approaches to Active Investing 567
Fundamental Law of Active Management 568
Strategies Based on Technical Analysis 571
Nonlinear Dynamic Models and Chaos 573
Technical Analysis and Statistical Nonlinear
Pattern Recognition 574
Market-Neutral Strategies and Statistical Arbitrage 575
Application of Multifactor Risk Models 577
Risk Decomposition 577
Portfolio Construction and Risk Control 582
Assessing the Exposure of a Portfolio 583
Risk Control Against a Stock Market Index 587
Tilting a Portfolio 587
Summary 589
CHAPTER 20
Term Structure Modeling and Valuation of Bonds and Bond Options 593
Basic Principles of Valuation of Debt Instruments 594
Yield-to-Maturity Measure 596
Premium Par Yield 598
Reinvestment of Cash Flow and Yield 598
The Term Structure of the Interest Rates and the Yield Curve 599
Limitations of Using the Yield to Value a Bond 602
Valuing a Bond as a Package of Cash Flows 603
Obtaining Spot Rates from the Treasury Yield Curve 603
Using Spot Rates to the Arbitrage-Free Value of a Bond 606