[Update: Within four weeks of the original publication of this research report, Risk Magazine reported in its 28th February 2012 issue story titled 'Goodbye VaR? Basel to Consider Other Risk Metrics': "A review of trading book capital rules, due to be launched in March by the Basel Committee on...

In the aftermath of the Global Financial Crisis, some risk management practitioners have advocated wider adoption of Bayesian inference to replace Value- at-Risk (VaR) models in order to minimize risk failures. Despite its limitations, the Bayesian methodology has significant advantages. Just...

In aftermath of the Financial Crisis, some risk management practitioners advocate wider adoption of Bayesian inference to replace Value-at-Risk (VaR) models for minimizing risk failures (Borison & Hamm, 2010). They claim reliance of Bayesian inference on subjective judgment, the key limitation...

Investors sometimes have strong convictions that a distinctive economic regime will prevail in the period ahead and therefore would like to form a portfolio that reflects the expected returns, standard deviations, and correlations of assets during such a regime. To do so, they typically isolate...

This paper outlines a tactical asset allocation (TAA) strategy that takes signals from the credit markets and applies them to the stock market. A power model is built using the Russell 2000 equity index and the Bank of America/Merrill Lynch High Yield B index. This model is then used in a...

The paper is an empirical research work wherein the principle of Modern Portfolio Theory along with aspects of geographical diversification have been subjected to test. The validation of the said theory has been made via hypothesis testing in light of the financial market data. The paper has...

The motivation for this paper is to find out whether exchange traded funds (ETFs) are more suitable financial instruments for a pair trading strategy than stocks. The main advantage of pair trading ETFs is that ETFs cannot go bankrupt, which is not the case for shares. Thus, one of the greatest...

Traditional portfolio optimization models specify placement of capital as rather irrevocably and fully at risk through investment horizon(s) or continuously. Under this constraint, asset class allocation typically serves as primary mode of diversification, pursuing risk moderation by seeking to...

Ever since Harry Markowitz published his seminal paper on portfolio selection, investors have incorporated estimates of future volatilities and correlations into their asset allocation process. While portfolio construction methods continue to evolve, many investors continue to forecast...