Realistic volatility risk premia
The volatility risk premium compensates investors for taking volatility risk. Conceptually it is based on the difference between options-implied and expected realized volatility. In...
Variance term premia
Variance term premia are surcharges on traded volatility that compensate for bearing volatility risk in respect to underlying asset prices over different forward horizons....
Multiple risk-free interest rates
Financial markets produce more than one risk-free interest rate. This is because there are several separate market segments where structured trades replicate such a...
Earnings yields, equity carry and risk premia
Forward earnings yields and equity carry are plausible indicators of risk premia embedded in equity index futures prices. Data for a panel of 25...
What variance swaps tell us about risk premia
Variance swaps are over-the-counter derivatives that exchange payments related to future realized price variance against fixed rates. Variance swaps help estimating term structures for...
The importance of volatility of volatility
Options-implied volatility of U.S. equity prices is measured by the volatility index, VIX. Options-implied volatility of volatility is measured by the volatility-of-volatility index, VVIX....
FX carry strategies (part 2): Hedging
There is often a strong case for hedging FX carry trades against unrelated global market factors. It is usually not difficult to hedge currency...
FX carry strategies (part 1)
FX forward-implied carry is a valid basis for investment strategies because it is related to policy subsidies and risk premia. However, it also contains...
Finding implicit subsidies in financial markets
Implicit subsidies in financial markets can be defined as expected returns over and above the risk free rate and conventional risk premia. While conventional...
Commodity pricing
A new paper combines two key aspects of commodity pricing: a rational pricing model based on the present value of future convenience yields...
RECENT ARTICLES
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...