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...

Algorithmic strategies: managing the overfitting bias

The business of algorithmic trading strategies creates incentives for model overfitting and backtest embellishment: researchers must pass Sharpe ratio thresholds for their strategies to...

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...

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The popular view that nominal interest rates have a natural zero lower bound has become obsolete in modern financial systems. It may be more...

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Allocators to systematic strategies usually trust live records far more than backtests. Given the moral hazard issues of backtesting in the financial industry, this...

Bayesian Risk Forecasting

Portfolio risk forecasting is subject to great parameter uncertainty, particularly for longer forward horizons. This simply reflects that large drawdowns are observed only rarely,...

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