Mr. Madoff's Amazing Returns: An Analysis of the Split-Strike Conversion Strategy
Posted: 1 Apr 2009 Last revised: 21 May 2019
Date Written: May 14, 2009
Abstract
It is now known that the very impressive investment returns generated by Bernie Madoff were based on a sophisticated Ponzi scheme. Madoff claimed to use a split-strike 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 the 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 the Madoff's returns lie well outside their theoretical bounds and should have raised suspicions about Madoff's performance.
Keywords: Madoff, split-strike conversion strategy, performance measurement
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Risk Management Lessons from Madoff Fraud
By Pierre Clauss, Thierry Roncalli, ...
-
Bringing Out the Big Guns: The USA Patriot Act, Money Laundering, and the War on Terrorism
-
The SEC and the Madoff Scandal: Three Narratives in Search of a Story
-
Estimating JP Morgan Chase’s Profits from the Madoff Deposits
By Lou Davis and Linus Wilson
-
Consecutive Identical Returns and the Stanford Group Scandal
By Don M. Chance and Ashley Schexnaildre