We provide a novel methodology for constructing optimal portfolios of financial assets that goes beyond the standard Markowitz and CAPM settings. Under general second order stochastic dominance we point out how via majorization techniques the efficient frontier can be constructed. For the...

While common machine learning algorithms focus on minimizing the mean-square errors of model fit, we show that genetic programming, GP, is well-suited to maximize an economic objective, the Sharpe ratio of the usual spread portfolio in the cross-section of expected stock returns. In contrast to...

The top quintile portfolio of a linear model that equally weighs value factors Book Value/Price, Cash Flow/Price, Dividend/Price, Earnings/Price and Sales/Price and one 9-month price momentum factor has outperformed the MSCI Developed World benchmark by 18% per year since 2001 and by 13% since...

Although several types of options on multiple assets are popular in today's financial markets, valuing multi-asset options is still a challenge in finance. The standard framework of multivariate normality is often inappropriate, since it ignores fat tails and other stylized facts of asset...

The financial crisis has raised concerns throughout the industry on the possibility that hedging credit valuation adjustment (CVA) might become increasingly difficult should the long-standing correlation between singlename and index CDS products break down. So, we provide an estimation of the...

Momentum is the premier market anomaly. It is nearly universal in its applicability. This paper examines multi-asset momentum with respect to what can make it most effective for momentum investors. We show that both absolute and relative momentum can enhance returns, but that absolute momentum...

The calculation of the capital charge for CVA risk, as required by the Basel Committee on Banking Supervision, is usually rather unstable due to the volatility of CDS spreads. Since credit derivatives on single names are not very liquid, the implied adjustments in capital charges could be...

High momentum returns cannot be explained by risk factors, but they are negatively skewed and subject to occasional severe crashes. I explore the timing of momentum crashes and show that momentum strategies tend to crash in 1-3 months after the local stock market plunge. Next, I propose a simple...

From 1992 to 2011, average R2 increased from 0.17 to 0.47. During this period, passive financial institutions also grew their ownership from 30 to 50% of the market. Passive investors do not perform fundamental research nor trade around firm-specific news, thus reducing the firm-specific...