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Predicting Covariance Matrices of Returns

Posted on February 15, 2024 By 
Covariance plays an important role in portfolio construction as it measures the relationship between the returns of different assets in a portfolio. Understanding covariance helps investors to diversify their investments effectively by selecting assets that are not highly correlated with each other. Covariance also allows investors to assess the impact …
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How Investors Overreact During Bull and Bear Markets?

Posted on February 11, 2024 By 
Recently, equity market indices have been hitting new all-time highs. Some traders are even expressing frustration, claiming the markets are irrational and predicting a correction. Are investors overreacting in this market and pushing the indices higher? Reference examined the investor overreaction. The study is grounded in the widely recognized …
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When Are Stop Losses Effective?

Posted on February 7, 2024 By 
A stop loss serves as a risk management tool, helping investors limit potential losses by automatically triggering the sale of a security when its price reaches a predetermined level. This level is set below the purchase price for long positions and above the purchase price for short positions. By implementing …
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Do Moving Averages Add Value in Factor Investing?

Posted on February 3, 2024 By 
Moving averages are a useful tool in investing. They smooth out price data over a specific period, providing a clearer trend perspective. The most common types are the simple moving average (SMA) and the exponential moving average (EMA). Investors often use moving averages to identify trends and filter out short-term …
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Volatility Term Structures of Individual Stocks

Posted on January 30, 2024 By 
In 1993, the Chicago Board Options Exchange (CBOE) launched the Volatility Index (VIX), which became a crucial gauge for expected short-term market volatility. It serves as the foundation for trading volatility futures and portfolio hedging. Initially, the VIX was model-dependent and applied to the S&P100. Then, the CBOE developed a …
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Momentum in the Option Market, Part 3

Posted on January 22, 2024 By 
In previous posts, we discussed the momentum phenomena in the options market. In essence, evidence suggests that delta-hedged straddle option positions exhibit momentum. This means that firms whose options performed well in the past 6 to 36 months are likely to experience high option returns in the next month. Reference …
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How Negative Oil Futures Price Impacts Production

Posted on January 18, 2024 By 
A market shock, exemplified by the 1987 crash, denotes a sudden and severe disturbance in financial markets, leading to significant disruptions and abrupt changes in asset prices. This event can have a lasting impact. For instance, prior to the 1987 crash, volatility remained flat. Post the crash, there emerged a …
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Is Linear Regression Still a Good Prediction Method?

Posted on January 14, 2024 By 
Forecasting stock prices is a challenge due to the non-stationary nature of price time series and the noisy data inherent in these price sequences. Linear regression was a frequently used prediction method, but recent advancements in computing technologies have given rise to more sophisticated approaches like Long Short-Term Memory (LSTM), …
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Forecasting Short-Term Stock-Bond Correlation

Posted on January 10, 2024 By 
Stock-bond correlation is a critical factor in portfolio diversification, influencing how different asset classes interact during market movements. The correlation between stocks and bonds helps investors understand the degree to which these two assets move in relation to each other. In the years of 2010s, stocks and bonds have had …
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