Variance risk premia for patient investors

The variance risk premium manifests as a long-term difference between option-implied and expected realized asset price volatility. It compensates investors for taking short volatility...

The risk-reversal premium

The risk reversal premium manifests as an overpricing of out-of-the-money put options relative to out-of-the-money call options with equal expiration dates. The premium apparently...

The emotion beta of stocks

Stock markets cater to both the financial and emotional needs of investors. In particular, integral emotions, which are caused by decisions themselves, are useful...

Risk premia in energy futures markets

Energy futures markets allow transferring risk from producers or consumers to financial investors. According to the hedging pressure hypothesis, net shorts of industrial producers...

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...

Understanding the disposition effect

Investors have a tendency to sell assets that have earned them positive returns and are reluctant to let go of those that have brought...

Prospect theory value as investment factor

Prospect theory value as investment factor Prospect theory value is a valid investment factor, particularly in episodes of apparent market inefficiency. Prospect theory is a...

How banks’ dollar holdings drive exchange rate dynamics

Non-U.S. financial institutions hold precautionary positions in U.S. dollar assets as protection against financial shocks. This gives rise to a safety premium on the...

Factor timing

Factors beyond aggregate market risk are sources of alternative risk premia. Factor timing addresses the question when to receive and when to pay such...

The basics of low-risk strategies

Low-risk investment strategies prefer leveraged low-risk assets over high-risk assets. The measure of risk can be based on price statistics, such as volatility and...

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Six ways to estimate realized volatility

Asset return volatility is typically calculated as (annualized) standard deviation of returns over a sequence of periods, usually daily from close to close. However,...

Duration volatility risk premia

Duration volatility risk premium means compensation for bearing return volatility risk of an interest rate swap (IRS) contract. It is the scaled difference between...

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