Clues for estimating market beta
A new empirical paper compares methods for estimating “beta”, i.e. the sensitivity of individual asset prices to changes in a broad market benchmark. It...
External imbalances and FX returns
Hedge ratios of international investment positions have increased over past decades, spurred by regulation and expanding derivative markets. This has given rise to predictable...
Lessons from long-term global equity performance
A truly global and long-term (116 years) data set for both successful and failed financial markets shows that equity has delivered positive long-term performance...
The power and origin of uncertainty shocks
Uncertainty shocks are changes in beliefs about probabilities. They are perhaps the most powerful driver of financial markets. Uncertainty comes in various forms, such...
Identifying asset price bubbles
A new paper proposes a practical method for identifying asset price bubbles. First, one estimates deviations of prices from fundamentals based on three different...
The downside variance risk premium
The variance risk premium of an asset is the difference between options-implied and actual expected return variation. It can be viewed as a price...
FX returns and external balances
A new paper supports the view that currency excess returns can to some extent be viewed as compensation for risk to net capital flows...
Fake alpha
Statistical alpha can be divided into fake alpha, which is a premium for non-directional systematic risk, and true alpha, which reflects the quality of the...
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...
FX carry trade crashes
A global historical analysis of FX carry trades shows positive long-term performance but a negative skew of returns. Large drawdowns have been associated with...
RECENT ARTICLES
Macro information waste and the quantamental solution
Financial markets are not macro information efficient. This means that investment decisions miss out on ample relevant macroeconomic data and facts. Information goes to...
Statistical arbitrage risk premium
Any asset can use a portfolio of similar assets to hedge against its factor exposure. The factor residual risk of the hedged position is...
Market dynamics: belief, risk, and ambiguity effects
To understand financial market dynamics, it is helpful to distinguish beliefs, attitudes towards risk, and attitudes towards ambiguity. Beliefs are subjective evaluations of future...