The notion of compensation for systematic risk is well ingrained in finance and constitutes the basis for numerous empirical tests. The concept an increase in systematic risk is accompanied by an increase in the required risk premium has strong intuitive content: The more risk there is to be...

Characteristic-based factors embed large unpriced components that depress Sharpe ratios and deviate from the mean-variance efficient (MVE) frontier. We discuss how to decompose tradable factor returns into priced (MVE) and unpriced components, showing that hedging unpriced variation realigns...

This paper investigates the effect of derivatives on the relationship between the foreign exchange rate and the stock market. A theoretical model is used to extend the understanding of that relationship. Also, the model is tested with an empirical analysis using the GMM strategy for the Mexican...

In this paper we develop the first estimator of the covariance matrix that relies solely on forward-looking information. This estimator only uses price information from a cross-section of plain-vanilla options. In an out-of-sample study for US blue-chip stocks we show that a minimum-variance...

This paper solves the mean-variance hedging problem in Heston's model with a stochastic opportunity set moving systematically with the volatility of stock returns. We allow for correlation between stock returns and their volatility (so-called leverage effect).lt;brgt;lt;brgt;Our contribution is...

Non-agency mortgage-backed securities (MBS) are typically priced and traded on discounted cashflow basis where a cashflow projection is made under a prepayment and default scenario and discounted with a discount margin (DM) that supposedly measures credit risk. Whilest simple and intuitive to...

This paper considers a simple model of credit risk and derives the limit distribution of losses under different assumptions regarding the structure of systematic and idiosyncratic risks and the nature of firm heterogeneity. It documents a rich and complex interaction between the underlying model...

Purpose - The authors aim to examine the mean and volatility linkages between the gold market and the Latin American equity markets in the entire sample period and two crises periods, namely the US financial crisis and the Chinese crash. Design/methodology/approach - To examine the return and...

The introduction of derivatives on Bitcoin enables investors to hedge risk exposures in cryptocurrencies. Because of volatility swings and jumps in cryptocurrency prices, the traditional variance-based approach to obtain hedge ratios is infeasible. As a consequence, we consider two extensions of...

We find that realized skewness is a significant indicator of returns across a range of assets from different asset classes, namely commodities, government bonds, equity indices and currencies. Taking on skewness risk is broadly compensated within, but more substantially across asset classes....