This paper develops a Monte-Carlo backtesting procedure for risk premia strategies and employs it to study Time-Series Momentum (TSM). Relying on time-series models, empirical residual distributions and copulas we overcome two key drawbacks of conventional backtesting procedures. We create...

We study whether prices of traded options contain information about future extreme market events. Our option-implied conditional expectation of market loss due to tail events, or tail loss measure, predicts future market returns, magnitude, and probability of the market crashes, beyond and above...

We investigate market selection and bet pricing in a simple Arrow security economy which we show is equivalent to the repeated prediction market models studied in the literature. We derive the condition for long run survival of more than one agent (the crowd) and quantify the information content...

Stock selection models often use analysts' expectations, momentum, and fundamental data. We found support for composite modeling using these sources of data for global stocks during 1997-2011. We found additional evidence to support the use of SunGard APT and Axioma multi-factor models for...

We provide a closed-form solution to an optimal investment and consumption problem for a constant absolute risk aversion (CARA) agent, who faces execution costs when trading correlated risky assets with return predictability. The optimal investment strategy indicates that the agent should trade...

In this paper, we forecast industry returns out-of-sample using the cross-section of book-to-market ratios and investigate whether investors can exploit this predictability in portfolio allocation. Cash-flow and return forecasting regressions show that cross-industry book-to-market ratios...

Portfolio optimization often struggles in realistic out-of-sample contexts. We de-constructthis stylized fact, comparing historical forecasts of portfolio optimization inputs withsubsequent out of sample values. We confirm that historical forecasts are imprecise guidesof subsequent values but...

We quantify disagreement about the economy with ex-ante measures of divergence of opinion among economic forecasters and investigate if economic disagreement has a significant impact on the cross-sectional pricing of individual stocks. We find a significant disagreement premium of 7.2% per...

We investigate the out-of-sample forecasting ability of the HML, SMB, momentum, short-term and long-term reversal factors along with their size and value decompositions on U.S. bond and stock returns for a variety of horizons ranging from the short run (1 month) to the long run (2 years). Our...