Detecting market price distortions with neural networks
Detecting price deviations from fundamental value is challenging because the fundamental value itself is uncertain. A shortcut for doing so is to look at...
Risk management shocks and price distortions
Risk management relies on statistical metrics that converge on common standards. These metrics can change drastically alongside market conditions. A risk management shock is...
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...
RECENT ARTICLES
Inflation as equity trading signal
Academic research suggests that high and rising consumer price inflation puts upward pressure on real discount rates and is a headwind for equity market...
Economic growth and FX forward returns
Economic growth differentials are plausible predictors of foreign exchange return trends because they are related to differences in monetary policy and return on investment....
How to use FX carry in trading strategies
FX forward-implied carry is a valid basis for trading strategies because it is related to divergences in monetary and financial conditions. However, nominal carry...