AMIR KHANDANI, Massachusetts Institute of Technology (MIT)
Email: khandani@mit.edu
ANDREW W. LO, MIT Sloan School of Management, National Bureau of Economic Research (NBER)
Email: alo@mit.edu

During the week of August 6, 2007, a number of quantitative long/short equity hedge funds experienced unprecedented losses. It has been hypothesized that a coordinated deleveraging of similarly constructed portfolios caused this temporary dislocation in the market. Using the simulated returns of long/short equity portfolios based on five specific valuation factors, we find evidence that the unwinding of these portfolios began in July 2007 and continued until the end of 2007. Using transactions data, we find that the simulated returns of a simple marketmaking strategy were significantly negative during the week of August 6, 2007, but positive before and after, suggesting that the Quant Meltdown of August 2007 was the combined effects of portfolio deleveraging throughout July and the first week of August, and a temporary withdrawal of marketmaking risk capital starting August 8th. Our simulations point to two unwinds - a mini-unwind on August 1st starting at 10:45am and ending at 11:30am, and a more sustained unwind starting at the open on August 6th and ending at 1:00pm - that began with stocks in the financial sector and long Book-to-Market and short Earnings Momentum. These conjectures have significant implications for the systemic risks posed by the hedge-fund industry.

IGNACIO VELEZ-PAREJA, Universidad Tecnologica de Bolivar - Department of Finance and International Business
Email: ivelez@unitecnologica.edu.co

The Constant Growth Model attributed to Gordon (the Gordon Model) is one of the most known and popular models in Corporate Finance. In this work we show that even with adjustments in the calculation of the proper Weighted Average Cost of Capital, WACC, in order to grant that the model with zero real growth and inflation is inflation neutral it has some inconsistencies. We develop a formulation for Ke, the cost of levered equity that is consistent and is inflation neutral. We identify problems of consistency and non inflation neutrality when using the Weighted Average Cost of Capital, WACC.

TYRONE CARLIN, affiliation not provided to SSRN
Email: tyrone.carlin@gsm.mq.edu.au
LIEN THI PHAM, affiliation not provided to SSRN
Email: lienpt@hotmail.com
HA VIET HOANG, Macquarie University
Email: hoangvietha@hotmail.com

The main purpose of this paper is to examine determinants of the "level" and the "rate" of technical efficiency by firstly exploring a firm-level data set of 4600 enterprises in the industrial sector of Vietnam during transition from 2001-2005. The empirical results reveal a strong ownership impact on efficiency. Private ownership exhibits the highest robustness and state ownership, on the other hand, exhibits the lowest robustness to both the "level" and the "rate" of technical efficiency. Firms have gained efficiency from implementing higher levels of capital intensity, operating in larger business of scales, competing in high competitive industries and locating in high-income regions. The paper also suggests policy implication from the empirical findings.

IGNACIO VELEZ-PAREJA, Universidad Tecnologica de Bolivar - Department of Finance and International Business
Email: ivelez@unitecnologica.edu.co

In this work we explain the proper use of perpetuities and the value of them. We consider two cases: calculating the value on period zero when the perpetuity starts with a given cash flow in period 1 and when it starts from a cash flow in period zero and it grows in period 1 at a given rate (as when we calculate a terminal or continuing value). We derive the proper expressions for the two cases.

In particular we focus the analysis when there is no real growth and expected inflation is positive.

We conclude that depending on which is the case we can use or not the Constant Growth Model (Gordon Model).