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, ...

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...

Building a real-time market distress index

A new Fed paper explains how to construct a real-time distress index, using the case of the corporate bond market. The index is based...

Why financial markets misprice fundamental value

Experimental research has produced robust evidence for mispricing of assets relative to their fundamental values even with active trading and sufficient information. Academic studies...

Basics of market liquidity risk

Market liquidity measures the cost efficiency of trading. Liquidity risk refers to the probability that these costs surge when trading is required. Liquidity and...

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...

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...

Using VIX for forecasting equity and bond returns

Over the past 25 years the relation between implied equity volatility (VIX) and market returns has been non-linear. When VIX was low there was no meaningful relation....

Quantitative easing and “VaR shocks”

Securities held by VaR (Value-at-Risk)-sensitive institutional investors, such as banks, are prone to escalatory selling pressure after an initial shock, in particular if they...

The danger of volatility feedback loops

There is evidence that the financial system has adapted to low fixed income yields through an expansion of explicit and implicit short volatility strategies....

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Crashes in safe asset markets

A new theoretical paper illustrates the logic behind runs and crashes in modern safe asset markets. Safe assets are characterized by stable value and...

Copulas and trading strategies

Reliance on linear correlation coefficients and joint normal distribution of returns in multi-asset trading strategies can be badly misleading. Such conventions often overestimate diversification...

Trend following: combining market and macro information

Classic trend following is based on market prices or returns. Market trends are relatively cheap to produce, popular, and plausibly generate value in the...

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