Identifying asset price bubbles

A new paper proposes a practical method for identifying asset price bubbles. First, one estimates deviations of prices from fundamentals based on three different...

Basic theory of momentum strategies

Systematic momentum trading is a major alternative risk premium strategy across asset classes. Time series momentum motivates trend following; cross section momentum gives rise...

Clues for estimating market beta

A new empirical paper compares methods for estimating “beta”, i.e. the sensitivity of individual asset prices to changes in a broad market benchmark. It...

The downside variance risk premium

The variance risk premium of an asset is the difference between options-implied and actual expected return variation. It can be viewed as a price...

How to use financial conditions indices

There are two ways to use financial conditions indicators for macro trading. First, the tightening of aggregate financial conditions helps forecasting macroeconomic dynamics and...

FX returns and external balances

A new paper supports the view that currency excess returns can to some extent be viewed as compensation for risk to net capital flows...

FX carry trade crashes

A global historical analysis of FX carry trades shows positive long-term performance but a negative skew of returns. Large drawdowns have been associated with...

Fake alpha

Statistical alpha can be divided into fake alpha, which is a premium for non-directional systematic risk, and true alpha, which reflects the quality of the...

Lessons from long-term global equity performance

A truly global and long-term (116 years) data set for both successful and failed financial markets shows that equity has delivered positive long-term performance...

The power and origin of uncertainty shocks

Uncertainty shocks are changes in beliefs about probabilities. They are perhaps the most powerful driver of financial markets. Uncertainty comes in various forms, such...

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Drawdown control

Containment of drawdowns and optimization of performance ratios for multi-asset portfolios is critical for trading strategies. Alas, short data series or structural changes often...

Liquidity yields and FX

Liquidity yields are convenience yields of financial securities that typically arise from high liquidity, suitability as collateral or preferred regulatory status. New research argues...

The fundamental value trap

Fundamental value seems like a straightforward investment approach. One simply looks for assets that are “cheap” or “expensive” relative to their rationally expected risk-adjusted...

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