We give an explicit algorithm and source code for combining alpha streams via bounded regression. In practical applications, typically, there is insufficient history to compute a sample covariance matrix (SCM) for a large number of alphas. To compute alpha allocation weights, one then resorts to...

Based on the typical positions of S&P 500 option market makers, we derive a funding illiquidity measure from quoted prices of S&P 500 derivatives. Our measure significantly affects the returns of leveraged managed portfolios; hedge funds with negative exposure to changes in funding illiquidity...

Insurers issuing segregated fund policies apply dynamic hedging to mitigate risks related to guarantees embedded in such policies. A typical industry practice consists of using fund mapping regressions to represent basis risk stemming from the imperfect correlation between the underlying fund...

Due to the strong complexity of financial markets, economics does not have a unified theory of price formation in financial markets. The most common assumption is the Efficient-Market Hypothesis, which has been attacked by a number of researchers, using different tools. There were varying...

Evaluating risk measures, premiums, and capital allocation based on dependent multi-losses is a notoriously difficult task. In this paper, we demonstrate how this can be successfully accomplished when losses follow the multivariate Pareto distribution of the second kind, which is an attractive...

Over the last three decades, the world economy has been facing stock market crashes, currency crisis, the dot-com and real estate bubble burst, credit crunch and banking panics. As a response, extreme value theory (EVT) provides a set of ready-made approaches to risk management analysis....

The hidden Markov model (HMM) is typically used to predict the hidden regimes of observation data. Therefore, this model finds applications in many different areas, such as speech recognition systems, computational molecular biology and financial market predictions. In this paper, we use HMM for...

In this study, we investigated the impact of COVID-19 investor sentiment (CS), number of cases (CC), and deaths (CD) on bank stock returns in 16 MENA countries. In addition, we examined the interaction effects of CS with CC and CD on bank stock returns. Lastly, we looked at whether Islamic banks...

This study examines the effect of the COVID-19 pandemic on the relationship between idiosyncratic volatility and expected stock returns. Using daily stock return data in the US market from the Center for Research in Security Prices (CRSP), we estimate monthly idiosyncratic volatility and...

The key to understanding the dynamics of stock markets, particularly the mechanisms of their changes, is in the concept of the market regime. It is regarded as a regular transition from one state to another. Although the market agenda is never the same, its functioning regime allows us to reveal...