This paper formally implements time-varying risk price models for currency returns. Focusing upon time variation in risk prices, the paper explores four currency risk factors. In addition to dollar and carry factors, we employ momentum and value factors which are widely used by currency...

We examine the interaction between funds implementing hedge and merger arbitrage strategies and a set of traditional assets comprising equities, bonds, gold, crude oil, currency, commodities and real estate, by applying a time-varying spillover approach for the period 1/1/2010-7/31/2020. Results...

Portfolio optimization should provide large benefits to investors, but standard mean-variance optimization (MVO) works so poorly in practice that optimization is often abandoned. The approaches developed to address this issue are often surrounded by mystique regarding how, why, and whether they...

Contrary to conventional wisdom in nance, return prediction R2 and optimal portfolio Sharpe ratio generally increase with model parameterization, even when minimal regularization is used. We theoretically characterize the behavior of return prediction models in the high complexity regime, i.e....

We propose a new asset-pricing framework in which all securities' signals are used to predict each individual return. While the literature focuses on each security's own- signal predictability, assuming an equal strength across securities, our framework is flexible and includes...

This paper examines “fat tails puzzle” in the financial markets. Ignoring the rate of convergence in Central Limit Theorem (CLT) provides the “fat tail” uncertainty. In this paper, we provide a review of the empirical results obtained “fat tails puzzle” using innovative method of...

The profitability of a trading system based on the momentum-like effects of price jumps was tested on the time series of 7 assets (EUR/USD, GBP/USD, USD/CHF and USD/JPY exchange rates and Light Crude Oil, E-Mini S&P 500 and VIX Futures), in each case for 7 different frequencies (ranging from...

We investigate the performance of non-linear return prediction models in the high complexity regime, i.e., when the number of model parameters exceeds the number of observations. We document a "virtue of complexity" in all asset classes that we study (US equities, international equities, bonds,...

We study the size and drivers of non-standard errors (Menkveld et al., 2021) in portfolio sorts across 14 common methodological decision nodes and 40 sorting variables. These non-standard errors range between 0.05 and 0.26 percent and are, on average, larger than standard errors. Supposedly...

We propose an information theoretic approach to measure price efficiency of financial assets and aggregate markets. Our measures draw on the idea of return predictability and are directly linked to the weak-form efficiency of the Efficient Market Hypothesis. Asness et. al. (2013) document strong...