Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-11-22T18:57:34.609Z Has data issue: false hasContentIssue false
  • English
  • Français

Risk Assessment Techniques for Split Capital Investment Trusts

Published online by Cambridge University Press:  10 May 2011

A. T. Adams  and
J. B. Clunie
A. T. Adams
Affiliation:
The Management School, University of Edinburgh, William Robertson Building, 50 George Square, Edinburgh EH8 9JY, U.K., Email: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

The split capital investment trust crisis brought into focus the need for more reliable risk assessment techniques for shares in the sector. We discuss the strengths and weaknesses of traditional pricing and risk description measures for split capital investment trusts (e.g. gross redemption yield, cover, hurdle rates) and ways of making these more useful. We then examine the application of traditional option pricing techniques and discuss the problems encountered in this approach. Finally, we propose the use of stochastic modelling to deal more effectively with the complexities involved in both pricing shares and understanding their risks.

Keywords

Risk AssessmentSplit Capital Investment TrustsClosed-End FundsOption PricingStochastic Modelling
Type
Papers
Information
Annals of Actuarial Science , Volume 1 , Issue 1 , March 2006 , pp. 7 - 36
Copyright
Copyright © Institute and Faculty of Actuaries 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adams, A.T. (1999). Sensitivity measures for split-capital investment trusts. IMA Journal of Mathematics Applied in Business and Industry, 10, 347–364.Google Scholar
Adams, A.T. (2003). Excess volatility and investment trusts. Finance Letters, 1(5), 14–17.Google Scholar
Adams, A.T. (2004). Introduction. Chapter 1 in Adams, A.T. (ed.) The split capital investment trust crisis. Wiley.Google Scholar
Adams, A.T. & Angus, R.J. (2001). For whom the barbell tolls … Professional Investor, 11(3), April, 14–17.Google Scholar
Association of Investment Trust Companies. (2003). Statement of recommended practice.Google Scholar
Barrie & Hibbert Ltd. (2003). Split capital investment trust Monte Carlo simulation model.Google Scholar
Black, F. & Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economy, 81, 637–654.Google Scholar
Boyle, P.P. (1977). Options: a Monte Carlo approach. Journal of Financial Economics, May, 323–338.Google Scholar
Cazenove & Co. (2002). Zeros as options.Google Scholar
Cazenove & Co. (2005). Investment Trust Companies Monthly, January.Google Scholar
FSA (2003). Policy statement on investment companies (including investment trusts). Financial Services Authority, London.Google Scholar
Gemmill, G. (2001). Capital structure and firm value: a study of split-capital closed-end funds in the U.K. City University Business School.Google Scholar
Gemmill, G. (2002). Testing Merton's model for credit spreads on zero-coupon bonds. City University Business School.Google Scholar
Hull, J.C. (2003). Options, futures & other derivatives, Chapter 14. Prentice-Hall International.Google Scholar
HCTC (2003). Split capital investment trusts. (Third Report of Session 2002–03, Volume II, minutes of evidence and appendices), House of Commons Treasury Committee.Google Scholar
Ingersoll, J.E. (1976). A theoretical and empirical investigation of the dual purpose funds. Journal of Financial Economics, 3, 83–123.Google Scholar
Jarrow, R.A., Lando, D. & Turnbull, S.M. (1997). A Markov model for the term structure of credit risk spreads. The Review of Financial Studies, 10, 481–523.Google Scholar
Jarrow, R.A. & O'Hara, M. (1989). Primes and scores: an essay in market imperfections. Journal of Finance, 44, 1263–1287.Google Scholar
Litzenberger, R.H. & Sosin, H.B. (1977). The structure and management of dual purpose funds. Journal of Financial Economics, 4, 203–230.Google Scholar
Merrill Lynch (1999). Zero dividend preference shares — what are they worth?Google Scholar
Merrill Lynch (2001). Zero dividend preference shares — understanding the risks and how to price them.Google Scholar
Merton, R.C. (1973). The theory of rational option pricing. Bell Journal of Economics and Management Science, 4, 141–183.Google Scholar
Merton, R.C. (1974). On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance, 29, 449–470.Google Scholar
Moles, P. (2004). The impact of the structures. Chapter 5 in Adams, A.T. (ed.) The split capital investment trust crisis, Wiley.Google Scholar
Newlands, J. (2000). Split capital & highly geared investment trusts. Williams de Broē.Google Scholar
Scott, L.O. (1997). Pricing stock options in a jump-diffusion model with stochastic volatility and interest rates: applications of Fourier inversion methods. Mathematical Finance, 7, 413–424.Google Scholar