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...
Understanding collateral runs
In normal financial runs lenders want their money back. In collateral runs borrowers want their collateral back. In today’s highly collateralized financial system the...
Interest rate swap returns: empirical lessons
Interest rate swaps trade duration risk across developed and emerging markets. Since 2000 fixed rate receivers have posted positive returns in 26 of 27...
Predicting asset price correlation for dynamic hedging
Dynamic hedging requires prediction of correlations and “betas” across asset classes and contracts. A new paper on dynamic currency hedging proposes two enhancements of...
RECENT ARTICLES
Estimating the positioning of trend followers
There is a simple method of approximating trend follower positioning in real-time and without lag. It is based on normalized returns in liquid futures...
Forecasting energy markets with macro data
Recent academic papers illustrate how macroeconomic data support predictions of energy market flows and prices. Valid macro indicators include shipping costs, industrial production measures,...
Fundamental trend following
Fundamental trend following uses moving averages of past fundamental data, such as valuation metrics or economic indicators, to predict future fundamentals, analogously to the...