The financial stability interest rate
The financial stability interest rate is a threshold above which the real interest rate in an economy triggers financial constraints and systemic instability. It...
Bayesian Risk Forecasting
Portfolio risk forecasting is subject to great parameter uncertainty, particularly for longer forward horizons. This simply reflects that large drawdowns are observed only rarely,...
Signaling systemic risk
Systemic financial crises arise when vulnerable financial systems meet adverse shocks. A systemic risk indicator tracks the vulnerability rather than the shocks (which are...
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...
RECENT ARTICLES
How to estimate factor exposure, risk premia, and discount factors
The basic idea behind factor models is that a large range of assets’ returns can be explained by exposure to a small range of...
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...
Classifying market regimes
Market regimes are clusters of persistent market conditions. They affect the relevance of investment factors and the success of trading strategies. The practical challenge...