In this paper we study a higher moment diversification measure, the so-called diversification delta (Vermorken et al. (2012)), in a dynamic portfolio optimization context. Particularly, we set up an investment strategy that dynamically maximizes the diversification delta for a given set of...

When assets exhibit asymmetric dependence or joint downside risk, diversificationcan fail and financial markets may be prone to systemic risk. We analyze thedependence structure of risk factors in the US economy, using both correlations anda parsimonious set of copulas. We find evidence of...

A central role for economic policy involves understanding and reducing the impact of unexpected,extreme events. In this paper, we develop a simple economic framework with latentregime switches. This framework explains why investors and policymakers can decide not tohedge against extreme events,...

We analyze the term structure of illiquidity premiums as the difference between the yield curves of two major bond segments that are both government guaranteed but differ in their liquidity. We show that its characteristics strongly depend on the economic situation. In crisis times, illiquidity...

Extant literature consistently documents that investors tilt their domestic equity portfolios towards regionally close stocks (local bias). We hypothesize that individual investors' local bias is not limited to the domestic sphere but instead also determines their international investment...

The macroprudential regulatory framework of Basel III imposes the same capital and liquidity requirements on all banks around the world to ensure global competitiveness of banks. Using an agent-based model of the financial system, we find that this is not a robust framework to achieve...

This paper describes a model in which a network of interbank loans leads to a severe amplification of the previously unanticipated insolvency of one bank. Banks that cannot rule out an indirect hit react by selling assets and hoarding liquidity. While this potentially lowers illiquidity risks,...

1970’s financial liberalization has been followed by the liberalization of commercial markets in the process of globalization. Liberalization of financial markets has caused the acceleration of capital flows and the increase of their volume. Capital that flows to developing countries suffering...

The theory of fair geometric returns, F theory for short, rejects the generally accepted notion that volatility is the risk of risky assets. Instead, it claims that capital market volatility, in turn, constitutes the maximum achievable geometric return. In order to get to the point, F theory, in...

The paper features an analysis of cryptocurrencies and the impact of the COVID- 19 pandemic on their effectiveness as a portfolio diversification tool. It does so by exploring the correlations between the continuously compounded returns on Bitcoin, Ethereum and the S&P500 Index, using a variety...