Related papers: Trends and Risk Premia: Update and Additional Plot…
We analyze the limiting behavior of the risk premium associated with the Pareto optimal risk sharing contract in an infinitely expanding pool of risks under a general class of law-invariant risk measures encompassing rank-dependent utility…
Managing a portfolio to a risk model can tilt the portfolio toward weaknesses of the model. As a result, the optimized portfolio acquires downside exposure to uncertainty in the model itself, what we call "second order risk." We propose a…
This paper characterises dynamic linkages arising from shocks with heterogeneous degrees of persistence. Using frequency domain techniques, we introduce measures that identify smoothly varying links of a transitory and persistent nature.…
We investigate how price variations of a stock are transformed into profits and losses (P&Ls) of a trend following strategy. In the frame of a Gaussian model, we derive the probability distribution of P&Ls and analyze its moments (mean,…
In this paper, we revisit the equity premium puzzle reported in 1985 by Mehra and Prescott. We show that the large equity premium that they report can be explained by choosing a more appropriate distribution for the return data. We…
High frequency data in finance have led to a deeper understanding on probability distributions of market prices. Several facts seem to be well stablished by empirical evidence. Specifically, probability distributions have the following…
The quantification of diversification benefits due to risk aggregation plays a prominent role in the (regulatory) capital management of large firms within the financial industry. However, the complexity of today's risk landscape makes a…
We solve exactly a simple model of trend following strategy, and obtain the analytical shape of the profit per trade distribution. This distribution is non trivial and has an option like, asymmetric structure. The degree of asymmetry…
We propose that predictability is a prerequisite for profitability on financial markets. We look at ways to measure predictability of price changes using information theoretic approach and employ them on all historical data available for…
The Pareto model is very popular in risk management, since simple analytical formulas can be derived for financial downside risk measures (Value-at-Risk, Expected Shortfall) or reinsurance premiums and related quantities (Large Claim Index,…
Portfolio diversification and active risk management are essential parts of financial analysis which became even more crucial (and questioned) during and after the years of the Global Financial Crisis. We propose a novel approach to…
We consider the problem of optimal risk sharing in a pool of cooperative agents. We analyze the asymptotic behavior of the certainty equivalents and risk premia associated with the Pareto optimal risk sharing contract as the pool expands.…
Cross-sectional dispersion in firm-level realized skewness is significantly and negatively related to future stock market returns. The predictive power of skewness dispersion is robust to in-sample and out-of-sample estimation and is…
Trading styles can be classified into either trend-following or mean-reverting. If the net trading style is trend-following the traded asset is more likely to move in the same direction it moved previously (the opposite is true if the net…
We revisit the problem of pricing options with historical volatility estimators. We do this in the context of a generalized GARCH model with multiple time scales and asymmetry. It is argued that the reason for the observed volatility risk…
We give a complete description of the third-moment (skewness) characteristics of both linear and nonlinear momentum trading strategies, the latter being understood as transformations of a normalised moving-average filter (EMA). We explain…
In a dual risk model, the premiums are considered as the costs and the claims are regarded as the profits. The surplus can be interpreted as the wealth of a venture capital, whose profits depend on research and development. In most of the…
In this paper, we investigate a financial market model consisting of a risky asset, modeled as a general diffusion parameterized by a scale function and a speed measure, and a bank account process with a constant interest rate. This…
We propose a method for extending a given asset pricing formula to account for two additional sources of risk: the risk associated with future changes in market--calibrated parameters and the remaining risk associated with idiosyncratic…
In this work, we study a dynamic portfolio optimization problem related to pairs trading, which is an investment strategy that matches a long position in one security with a short position in another security with similar characteristics.…