Why herding is the death of momentum

Momentum trading, buying winning assets and selling losing assets, is a most popular trading strategy. It relies on sluggish market adjustment, allowing the trader...

The macro information inefficiency of financial markets

There are reason and evidence for financial markets failing to be efficient with respect to macro trends. The main reason is cost: “tradable” economic...

Modern backtesting with integrity

Machine learning offers powerful tools for backtesting trading strategies. However, its computational power and convenience can also be corrosive for financial investment due to...

CDS term premia and exchange rates

The term structure of sovereign credit default swaps (CDS) is indicative of country-specific financial shocks because rising country risk affects short-dated maturities more than...

The predictability of market-wide earnings revisions

Forward earnings yields are a key metric for the valuation of an equity market. Helpfully, I/B/E/S and DataStream publish forward earnings forecasts of analysts...

How lazy trading explains FX market puzzles

Not all market participants respond to changing conditions instantaneously, not even in the FX market. Private investors in particular can take a long while...

Predicting equity volatility with return dispersion

Equity return dispersion is measured as the standard deviation of returns across different stocks or portfolios. Unlike volatility it can be measured even for...

U.S. dollar exchange rate before FOMC decisions

Since the mid-1990s the dollar exchange rate has mostly anticipated the outcome of FOMC meetings: it appreciated in the days before a rate hike...

Seasonal effects in commodity futures curves

Seasonal fluctuations are evident for many commodity prices. However, their exact size can be quite uncertain. Hence, seasons affect commodity futures curves in two...

Term premia and macro factors

The fixed income term premium is the difference between the yield of a longer-maturity bond and the average expected risk-free short-term rate for that...

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Estimating portfolio risk in extreme situations means answering two questions: First, has the market entered an extreme state? Second, how are returns likely to...

The dollar as barometer for credit market risk

The external value of the USD has become a key factor of U.S. and global credit conditions. This reflects the surge in global USD-denominated...

How salience theory explains the mispricing of risk

Salience theory suggests that decision makers exaggerate the probability of extreme events if they are aware of their possibility. This gives rise to subjective...

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