Financial risk managers routinely use non-linear time series models to predict the downside risk of the capital under management. They also need to evaluate the adequacy of their model using so-called backtesting procedures. The latter involve hypothesis testing and evaluation of loss functions....

We develop a method to identify the most important predictors of long-term asset returns and use it to analyze the impact of model uncertainty on long-term investors. We find that the impact of model uncertainty changes a lot over time which leads to considerable time-variation in all moments of...

Bayesian Model Averaging (BMA) has recently been discussed in the financial literature as an effective way to account for model uncertainty. In this paper we compare BMA to a new model uncertainty framework introduced by Yang (2004), called Aggregate Forecasting Through Exponential Reweighting,...

A model of portfolio return dynamics is considered in which the price of risk is permitted to be heterogeneous. In doing this, a novel method is proposed that delivers improved out-of-sample forecasts of portfolio returns. The main innovation is the use of a set of predictors that account for...

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...

A single macroeconomic factor based on growth in the capital share of aggregate income exhibits significant explanatory power for expected returns across a range of equity characteristic portfolios and non-equity asset classes, with risk price estimates that are of the same sign and similar in...

Due to arbitrage risk asymmetries, the relationship between idiosyncratic risk and expected returns is positive (negative) among overpriced (underpriced) stocks. We offer a new active anomaly-selection strategy that capitalizes on this effect. To this end, we consider eleven equity anomalies in...

Generalized unexpected raise in life expectancy is a source of aggregate risk. Longevity‐linked securities are a natural instrument to reallocate these risks by making them tradeable in the financial market. This paper extends the Campbell and Viceira (2005) strategic asset allocation model...

This paper proposes a framework to evaluate the impact of longevity-linked securities on the risk-return trade-off for traditional portfolios. Generalized unexpected raise in life expectancy is a source of aggregate risk in the insurance sector balance sheets. Longevity-linked securities are a...

This paper examines the lead/lag relations between size-sorted portfolio returns through the lens of financial cycles governing these returns using a novel econometric methodology. Specifically, we develop a Markov-switching vector autoregressive model that allows for imperfect synchronization...