How market liquidity causes price distortions

Liquidity is a critical force behind market price distortions (and related trading opportunities). First, the cost of trading in and out of a contract...

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...

Rebalancing and market price distortions

Price distortions are an important source of short-term trading profits, particularly in turbulent markets. Here price distortions mean apparent price-value gaps that arise from...

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, ...

A theory of hedge fund runs

Hedge funds’ capital structure is vulnerable to market shocks because most of them offer high liquidity to loss-sensitive investors. Moreover, hedge fund managers form...

Market noise

The term “market noise” refers to transactions that are erratic and unrelated to fundamental value. Theory suggests that without market noise profitable trading would...

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...

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...

A brief history of quantitative equity strategies

Understanding quantitative equity investments means understanding a significant portion of market positions. Motivated by the apparent failure of the capital asset pricing model and...

Beta herding

Beta herding means convergence of market betas of individual stocks that arises from investors’ biased perceptions. Adverse beta herding denotes the dispersion of such...

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Hedge ratios of international investment positions have increased over past decades, spurred by regulation and expanding derivative markets. This has given rise to predictable...

Predicting volatility with heterogeneous autoregressive models

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