We provide empirical evidence that the returns on US equity momentum exhibit a time-varying skewness which deepens during dramatic losses (crashes). As a result, the dynamics of the strategy expected returns reflects the time variation in both conditional volatility and skewness. This has first...

We investigate the effect of including variance derivatives as calibration and hedging instruments for pricing and hedging exotic structures. This is studied empirically using market data for SPX and VIX derivatives applied in a stochastic volatility jump diffusion model

It has been widely observed that capitalization-weighted indexes can be beaten by surprisingly simple, systematic investment strategies. Indeed, in the U.S. stock market, equal-weighted portfolios, random-weighted portfolios, and other naïve, non-optimized portfolios tend to outperform a...

We consider two forms of volatility weighting (own volatility and underlying asset volatility) applied to cross-sectional and time-series momentum strategies. We present some simple theoretical results for the Sharpe ratios of weighted strategies and show empirical results for momentum...

The expected returns have to be converged to the single rate in the same equity market through arbitrage as the return difference provides an arbitrage opportunity, which recurs to narrow any differentials. The beta is eventually unnecessary as a composition of the equity cost computation...

Compared to using the variance of index returns, managing investment by the average of the variance of index components (AV) produces significant return and ratio performance improvements. AV managed investment in the market index takes less extreme leverage making it more practical and cheaper...

S&P 500 Index option-based volatility indexes have untenable risk-return profiles. These volatility indexes are not designed with consideration of important real-world risk characteristics of options and fail to represent volatility as a differentiated asset-class with relevance to the long-term...

There is now a substantial literature on the effects of rebalancing on portfolio performance. It is widely argued in the theoretical literature that rebalanced strategies are inherently likely to generate greater terminal wealth than unrebalanced strategies, although empirical studies do not...

Stock market volatility is not constant over time. It exhibits cyclicality, with higher volatility in bear market cycles and lower volatility in bull market cycles. Failure to take into account this cyclicality would lead to sub-optimal portfolio performance and could result in improper risk...

One of the main explanations for the idiosyncratic volatility (IVOL) puzzle (i.e., the negative relation between lagged IVOL and returns) is a missing risk factor. We show analytically that if IVOL proxies for a missing risk factor, then the negative relation between IVOL and returns should...