1,720,970 research outputs found
A new tight and general bound on return predictability
No full textWe propose a novel upper bound on the predictability of asset returns. This bound is tighter than the bound proposed by Ross (2005) because it takes into account not only the volatility of the pricing kernel but also the correlation between the pricing kernel and trading strategies that exploit predictability. It is also at least as tight as the bound proposed by Huang and Zhou (2017). We apply our bound to study the predictability of returns on currencies of emerging and developed economies from 1994 to 2016. We find evidence of return predictability in excess of the bound, especially for emerging markets currencies. This implies either market inefficiency or, alternatively, that investors either can become very risk-averse or price currencies using a model radically different from the CAPM. In contrast, the evidence of excess-predictability is much weaker under the wider bound proposed by Ross (2005)
A DCC-VARMA Model of Portfolio Risk A Simple Approach to the Estimation of the Variance-Covariance Matrix of Large Stock Portfolios
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Assessing network risk with FRM: links with pricing kernel volatility and application to cryptocurrencies
Full text linkThe Financial Risk Meter (FRM) employs Quantile-LASSO regression to identify systemic financial risk and dependencies among tail events across financial assets. This paper establishes, both theoretically and empirically, a meaningful economic relationship between the FRM index, derived from the penalization parameter in quantile LASSO regression, and the volatility of assets' pricing kernels, the attainable maximal Sharpe ratio, and market volatility. Despite the rapid growth of the crypto market and its increasing integration with traditional financial markets, there remains a dearth of risk measures in this space. (Formula presented.) exhibits robust predictive capabilities in anticipating future market risk, potentially filling a critical void in this market
Revisiting the Silver Crisis
Full text linkThis paper examines the Silver Crisis of the late 1970s, which resulted in a $150 million lawsuit against the Hunt Brothers. In August 1988, the Hunt Brothers were found guilty by a jury of conspiracy, manipulation, monopolization, racketeering and fraud. Using a behavioural model, we aim to quantify the extent of manipulation in the silver market during the 1970s and the 1980s, with a specific focus on the period leading up to the Silver Crisis. Our behavioural model takes account of the role of fundamentals, manipulation and speculation. Our results indicate very little evidence of manipulation in the silver market in the run up to the Silver Crisis. Both fundamentals and speculation dominate the silver market during our sample, with speculation particularly important in the latter half of the 1970s. The distinction between manipulation and speculation is critical. While manipulation forces prices away from their fundamental value, speculation does not. Speculators certainly aim to take advantage of price changes but the actions are fully rational and consistent with the fundamental value of silver
Food Prices, Ethics and Forms of Speculation
Full text linkThis paper examines the role of speculative motives in the determination of commodity prices and specifically food related commodity prices. The motivation for this study is the considerable flow of funds into commodities, the widespread view that the process of financialization has led to greater levels of speculation and that speculation is the primary cause of regular spikes in food prices since the turn of the century. We consider two forms of short-term trading, a biasing influence (Manipulators) and a correcting influence (Speculators), relative to the fundamental price. While both forms of short-term trading are relevant, they are small in terms of their influence on overall prices. We do however find some evidence of an increased role being played by Manipulators during the period most associated with financialization
Orthogonal polynomials for tailoring density functions to excess kurtosis, asymmetry and dependence
No full textFollowiong on a reappraisal of othogonal-polynomial role in characterizing a distribution, this paper investigates the issue of how to tailor distributions to embody evidence of moments and dependance behaviours deviating from theoretic instances. As the paper shows, the orthogonal polynomials associated with a distribution clear the way to reshaping distributions so as to encode information on extra kurtosis, and between-squares dependence. Operational conditions of positive definiteness of modified distributions are duly provided
The role of orthogonal polynomials in adjusting hyperpolic secant and logistic distributions to analyse financial asset returns
No full textIn this paper, we will tackle the issue of accounting for skewness and potentially severe excess kurtosis of the empirical distribution of a random variable of interest by adjusting a parent leptokurtic distribution, using orthogonal polynomials. We will show that the polynomial shape adapter that allows the transformation from a given parent to a target distribution is a linear combination of the orthogonal polynomials associated to the former with coefficients depending on the difference between the moments of these two distributions. A recent work (Zoia, Commun Stat Theory Methods 39(1):52–64, 2010) has shown how to adjust the normal density by using Hermite polynomials but this application is suitable only for series with moderate kurtosis (lower than 5). This is why we provide two other parent distributions, the logistic and the hyperbolic secant which, once polynomially adjusted, can be used to reshape series with higher degrees of kurtosis. We will apply these results for modelling heavy-tailed and skewed distributions of financial asset returns by using both the conditional and unconditional approaches. We empirically demonstrate the advantages of using the polynomially adapted distributions in place of popular alternatives
Predictability, trading rule profitability and learning in currency markets
No full textThis paper studies currency predictability over time. We assess predictability by testing for the presence of exploitable patterns in currency returns. To do so, we first generate consistent and parsimonious reduced-form estimates of currency expected returns and variances and then use these estimates to form dynamic trading strategies that maximize the multi-period Sharpe ratio. Our results show that currency predictability is time-varying and, for a number of currencies, has increased substantially in recent times, casting doubt on the widespread view that currency pricing may be on a path of convergence towards efficiency. We find, however, that currency markets learn in an efficient manner and a close relation between our strategies and indices that track popular technical trading rules, namely moving average cross-over rules and the carry trade, suggesting that the technical rules represent heuristics by which professional market participants exploit currency mispricing
Commodity futures return predictability and intertemporal asset pricing
No full textWe find out-of-sample predictability of commodity futures excess returns using combination forecasts of 28 potential predictors. Such gains in forecast accuracy translate into economically significant improvements in certainty equivalent returns and Sharpe ratios for a mean–variance investor. Commodity return forecasts are closely linked to the real economy. Return predictability is countercyclical, and the combination forecasts of commodity returns have significant predictive power for future economic activity. Two-factor models featuring the market factor and the innovations in each of the combination forecasts explain a substantial proportion of the cross-sectional variation of both commodity and equity returns. The associated positive risk premiums are consistent with Merton’s (1973) intertemporal capital asset pricing model (ICAPM), given how the combination forecasts predict an increase in future economic activity and a decline in stock market volatility in the time-series. Overall, combination forecasts act as state variables within the ICAPM, thus resurrecting a central role for macroeconomic risk in determining expected returns on commodities
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