Risk Management Lessons from Madoff Fraud

Clauss, Pierre; Roncalli, Thierry; Weisang, Guillaume

doi:10.2139/ssrn.1358086

Cited by 20 publications

(12 citation statements)

References 13 publications

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“…Looking at the impact of the skew complements the study of Clauss et al (2009). These authors show that it is possible to construct a split-strike strategy with a very low volatility but then it also has a very low return (to do so, one needs to buy put options almost atthe-money).…”

Section: Analysis Of the Empirical Resultsmentioning

confidence: 94%

“…Then, they argue that the only way to obtain a similar trend of the returns as Madoff's returns is to assume that Madoff was an outstanding stock-picker. Ignoring the skew but including an 8.5% extra return per year, Clauss et al (2009) construct a split-strike strategy that gives similar returns as Madoff (see Figure 5 of Clauss et al (2009). Including the impact of the skew on the strategy's cost in their study would lead to a much higher extra return than 8.5%.…”

Section: Analysis Of the Empirical Resultsmentioning

confidence: 99%

“…The price dynamics of the underlying asset S under the P measure are given by (2). Denote by X T the payoff of the option (in the case of the call option X T = max(S T − K c , 0) and in the case of the put X T = max(K p − S T , 0)).…”

Section: First Moments Of Standard Options Under the Physical Measurementioning

confidence: 99%

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Mr. Madoff’s Amazing Returns: An Analysis of the Split-Strike Conversion Strategy

Bernard¹,

Boyle²

2009

JOD

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It is now known that the very impressive investment returns generated by BernieMadoff were based on a sophisticated Ponzi scheme. Madoff claimed to use a splitstrike conversion strategy. This strategy consists of a long equity position plus a long put and a short call. In this paper we examine Madoff's returns and compare his investment performance with what could have been obtained using a split-strike conversion strategy based on the historical data. We also analyze the split-strike strategy in general and derive expressions for the expected return, standard deviation, Sharpe ratio and correlation with the market of this strategy. We find that Madoff's returns lie well outside their theoretical bounds and should have raised suspicions about Madoff's performance.

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Section: Analysis Of the Empirical Resultsmentioning

confidence: 94%

Section: Analysis Of the Empirical Resultsmentioning

confidence: 99%

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Mr. Madoff’s Amazing Returns: An Analysis of the Split-Strike Conversion Strategy

Bernard¹,

Boyle²

2009

JOD

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“…In fact, the custodian delegated the custody of the assets to an entity controlled by Madoff. See Clauss, Roncalli, and Weisang (2009).…”

Section: Resultsmentioning

confidence: 99%

Is There a Cost to Transparency?

Aggarwal

Jorion

2012

Financial Analysts Journal

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“…We note that considerable research (Schneeweis and Spurgin [2001], Clauss, Roncalli, and Weisang [2009], and Szado and Schneeweis [2010]) exists on the return distribution properties of a split-strike collar investment. We relate some of the unique features that the original Ponzi scheme had in common with the Madoff operation.…”

Section: Thomas Schneeweismentioning

confidence: 99%