How to estimate risk in extreme market situations

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

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...

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...

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...

How systemic financial risk is measured

Public institutions have developed a wide range of methods to track systemic financial risk. What most of them have in common is reliance on...

Equity index futures returns: lessons of 2000-2018

The average annualized return of local-currency index futures for 25 international markets has been 6% with a standard deviation of just under 20%. All...

The dangerous disregard for fat tails in quantitative finance

The statistical term ‘fat tails’ refers to probability distributions with relatively high probability of extreme outcomes. Fat tails also imply strong influence of extreme...

Understanding collateral runs

In normal financial runs lenders want their money back. In collateral runs borrowers want their collateral back. In today’s highly collateralized financial system the...

Interest rate swap returns: empirical lessons

Interest rate swaps trade duration risk across developed and emerging markets. Since 2000 fixed rate receivers have posted positive returns in 26 of 27...

Predicting asset price correlation for dynamic hedging

Dynamic hedging requires prediction of correlations and “betas” across asset classes and contracts. A new paper on dynamic currency hedging proposes two enhancements of...

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Equity return anomalies and their causes

The vast range of academically researched equity return anomalies can be condensed into five categories: return momentum, outperformance of high valuation, ...

Basic factor investment for bonds

Popular factors for government bond investment are “carry”, “momentum”, “value” and “defensive”. “Carry” depends on the steepness of the yield curve, which to some...

Endogenous market risk: updated primer

Endogenous risk arises from the interaction of financial market participants, as opposed to traded assets’ fundamental value. It often manifests as feedback loops after...

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