Statistical arbitrage risk premium
Any asset can use a portfolio of similar assets to hedge against its factor exposure. The factor residual risk of the hedged position is...
Understanding the disposition effect
Investors have a tendency to sell assets that have earned them positive returns and are reluctant to let go of those that have brought...
Prospect theory value as investment factor
Prospect theory value as investment factor
Prospect theory value is a valid investment factor, particularly in episodes of apparent market inefficiency. Prospect theory is a...
How banks’ dollar holdings drive exchange rate dynamics
Non-U.S. financial institutions hold precautionary positions in U.S. dollar assets as protection against financial shocks. This gives rise to a safety premium on the...
Factor timing
Factors beyond aggregate market risk are sources of alternative risk premia. Factor timing addresses the question when to receive and when to pay such...
The basics of low-risk strategies
Low-risk investment strategies prefer leveraged low-risk assets over high-risk assets. The measure of risk can be based on price statistics, such as volatility and...
The q-factor model for equity returns
Investment-based capital asset pricing looks at equity returns from the angle of issuers, rather than investors. It is based on the cost of capital...
The price effects of order flow
Order flow means buyer- or seller-initiated transactions at electronic exchanges. Order flow consumes liquidity provided by market makers and drives a wedge between transacted...
Dealer capital ratios and FX carry returns
When financial market intermediaries warehouse net risk positions of other market participants the marginal value of their capital should affect the expected and actual...
The low-risk effect: evidence and reason
The low-risk effect refers to the empirical finding that within an asset classes higher-beta securities fail to outperform lower-beta securities. As a result, “betting...
RECENT ARTICLES
Measuring the value-added of algorithmic trading strategies
Standard performance statistics are insufficient and potentially misleading for evaluating algorithmic trading strategies. Metrics based on prediction errors mistakenly assume that all errors matter...
The emotion beta of stocks
Stock markets cater to both the financial and emotional needs of investors. In particular, integral emotions, which are caused by decisions themselves, are useful...
Risk premia in energy futures markets
Energy futures markets allow transferring risk from producers or consumers to financial investors. According to the hedging pressure hypothesis, net shorts of industrial producers...