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The Forecasting Ability of Correlations Implied in Foreign Exchange Options
Campa, Jose M. - 1997
This paper evaluates the forecasting accuracy of correlation derived from implied volatilities in dollar-mark, dollar …-yen, and mark-yen options from January 1989 to May 1995. As a forecast of realized correlation between the dollar-mark and … dollar-yen, implied correlation is compared against three alternative forecasts based on time series data: historical …
Persistent link: https://www.econbiz.de/10012472847
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Downside Risk
Ang, Andrew - 2005
Economists have long recognized that investors care differently about downside losses versus upside gains. Agents who place greater weight on downside risk demand additional compensation for holding stocks with high sensitivities to downside market movements. We show that the cross-section of...
Persistent link: https://www.econbiz.de/10012466847
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Forecasts in a Slightly Misspecified Finite Order VAR
Müller, Ulrich K. - 2011
We propose a Bayesian procedure for exploiting small, possibly long-lag linear predictability in the innovations of a finite order autoregression. We model the innovations as having a log-spectral density that is a continuous mean-zero Gaussian process of order 1/√T. This local embedding makes...
Persistent link: https://www.econbiz.de/10012461943
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A Sharper Ratio : A General Measure for Correctly Ranking Non-Normal Investment Risks
Smetters, Kent - 2013
While the Sharpe ratio is still the dominant measure for ranking risky assets, a substantial effort has been made over the past three decades to find a way to account for non-Normally distributed risks. This paper derives a generalized ranking measure which, under a regularity condition,...
Persistent link: https://www.econbiz.de/10012459163
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Maximizing Predictability in the Stock and Bond Markets
Lo, Andrew W. - 1995
We construct portfolios of stocks and of bonds that are maximally predictable with respect to a set of ex ante observable economic variables, and show that these levels of predictability are statistically significant, even after controlling for data-snooping biases. We disaggregate the sources...
Persistent link: https://www.econbiz.de/10012473866
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On the Correlation Structure of Microstructure Noise : A Financial Economic Approach
Diebold, Francis X. - 2010
volatility estimation. In particular, we use market microstructure theory to derive the cross-correlation function between latent … returns and market microstructure noise, which feature prominently in the recent volatility literature. The cross-correlation … geometrically. If market makers are sufficiently risk averse, however, the cross-correlation pattern is inverted. Our results are …
Persistent link: https://www.econbiz.de/10012462188
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Financial Risk Measurement for Financial Risk Management
Andersen, Torben G. - 2012
Current practice largely follows restrictive approaches to market risk measurement, such as historical simulation or RiskMetrics. In contrast, we propose flexible methods that exploit recent developments in financial econometrics and are likely to produce more accurate risk assessments, treating...
Persistent link: https://www.econbiz.de/10012460575
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Distilling the Macroeconomic News Flow
Beber, Alessandro - 2013
We propose a simple cross-sectional technique to extract daily factors from economic news released at different times and frequencies. Our approach can effectively handle the large number of different announcements that are relevant for tracking current economic conditions. We apply the...
Persistent link: https://www.econbiz.de/10012459013
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Hybrid Tail Risk and Expected Stock Returns : When Does the Tail Wag the Dog?
Bali, Turan G. - 2013
We introduce a new, hybrid measure of stock return tail covariance risk, motivated by the under-diversified portfolio holdings of individual investors, and investigate its cross-sectional predictive power. Our key innovation is that this covariance is measured across the left tail states of the...
Persistent link: https://www.econbiz.de/10012459202
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International Asset Allocation with Time-Varying Correlations
Ang, Andrew - 1999
It is widely believed that correlations between international equity markets tend to increase in highly volatile bear markets. This has led some to doubt the benefits of international diversification. This article solves the dynamic portfolio choice problem of a US investor faced with a...
Persistent link: https://www.econbiz.de/10012471745