Emerging market corporate bonds are perceived to offer attractive diversification potential and risk-adjusted returns, but to be illiquid. This study expands the empirical evidence by examining the liquidity of emerging market debt by solving a triangular structured system. We find emerging market bond liquidity both to share common determinants with developed markets and be influenced by macroeconomic factors. As the overall level of liquidity is lower than in developed markets, we propose a liquidity estimation model, which allows systematic factor investors to decrease the share of illiquid assets in their portfolio by roughly 3 percentage points and 10 percentage points during the COVID-19 pandemic.
{"title":"Managing Liquidity of Emerging Markets Corporate Debt","authors":"D. Vladimirova, D. Schiereck, Maximilian Stroh","doi":"10.2139/ssrn.4335009","DOIUrl":"https://doi.org/10.2139/ssrn.4335009","url":null,"abstract":"Emerging market corporate bonds are perceived to offer attractive diversification potential and risk-adjusted returns, but to be illiquid. This study expands the empirical evidence by examining the liquidity of emerging market debt by solving a triangular structured system. We find emerging market bond liquidity both to share common determinants with developed markets and be influenced by macroeconomic factors. As the overall level of liquidity is lower than in developed markets, we propose a liquidity estimation model, which allows systematic factor investors to decrease the share of illiquid assets in their portfolio by roughly 3 percentage points and 10 percentage points during the COVID-19 pandemic.","PeriodicalId":74863,"journal":{"name":"SSRN","volume":"33 1","pages":"57 - 78"},"PeriodicalIF":0.0,"publicationDate":"2023-03-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48573073","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article investigates the emerging segment of the cryptocurrency market related to football fan tokens (FFTs)—digital assets used for engagement with professional football clubs around the world. More specifically, the authors study the investability of FFTs from the perspective of risk and return. They find that FFTs generate a whopping 150% return on the first trading day. This return is significantly larger if the FFT market cap is higher, the FFT offer price is lower, the football team displays better historical performance, and the team is located in a relatively small metropolitan area with a high GDP per capita. They also find that in the long run, FFTs severely underperform all major crypto benchmarks, including NFT, DeFi, Meme, and bitcoin. Moreover, the returns to FFTs tend to be highly volatile (160% annualized). Intriguingly, they show that the real-life performance of football teams does not affect the contemporaneous market performance of their FFTs.
{"title":"Football and Cryptocurrencies","authors":"M. Mazur, M. Vega","doi":"10.2139/ssrn.4035558","DOIUrl":"https://doi.org/10.2139/ssrn.4035558","url":null,"abstract":"This article investigates the emerging segment of the cryptocurrency market related to football fan tokens (FFTs)—digital assets used for engagement with professional football clubs around the world. More specifically, the authors study the investability of FFTs from the perspective of risk and return. They find that FFTs generate a whopping 150% return on the first trading day. This return is significantly larger if the FFT market cap is higher, the FFT offer price is lower, the football team displays better historical performance, and the team is located in a relatively small metropolitan area with a high GDP per capita. They also find that in the long run, FFTs severely underperform all major crypto benchmarks, including NFT, DeFi, Meme, and bitcoin. Moreover, the returns to FFTs tend to be highly volatile (160% annualized). Intriguingly, they show that the real-life performance of football teams does not affect the contemporaneous market performance of their FFTs.","PeriodicalId":74863,"journal":{"name":"SSRN","volume":"26 1","pages":"23 - 38"},"PeriodicalIF":0.0,"publicationDate":"2023-03-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47705882","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Hedging is a common trading activity to manage the risk of engaging in transactions that involve derivatives such as options. Perfect and timely hedging, however, is an impossible task in the real market that characterizes discrete-time transactions with costs. Recent years have witnessed reinforcement learning (RL) in formulating optimal hedging strategies. Specifically, different RL algorithms have been applied to learn the optimal offsetting position based on market conditions, offering an automatic risk management solution that proposes optimal hedging strategies while catering to both market dynamics and restrictions. In this article, the author provides a comprehensive review of the use of RL techniques in hedging derivatives. In addition to highlighting the main streams of research, the author provides potential research directions on this exciting and emerging field.
{"title":"A Review on Derivative Hedging Using Reinforcement Learning","authors":"Peng Liu","doi":"10.2139/ssrn.4217989","DOIUrl":"https://doi.org/10.2139/ssrn.4217989","url":null,"abstract":"Hedging is a common trading activity to manage the risk of engaging in transactions that involve derivatives such as options. Perfect and timely hedging, however, is an impossible task in the real market that characterizes discrete-time transactions with costs. Recent years have witnessed reinforcement learning (RL) in formulating optimal hedging strategies. Specifically, different RL algorithms have been applied to learn the optimal offsetting position based on market conditions, offering an automatic risk management solution that proposes optimal hedging strategies while catering to both market dynamics and restrictions. In this article, the author provides a comprehensive review of the use of RL techniques in hedging derivatives. In addition to highlighting the main streams of research, the author provides potential research directions on this exciting and emerging field.","PeriodicalId":74863,"journal":{"name":"SSRN","volume":"5 1","pages":"136 - 145"},"PeriodicalIF":0.0,"publicationDate":"2023-03-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45088669","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article derives explicit expressions to simulate theta and gamma for American options using the pathwise derivative method. Although the pathwise derivative formulas for delta, rho, and vega of American options have been studied in the literature, no correct explicit results for theta and gamma exist. In addition, the authors propose a simulation-based least-square method to compute the optimal stopping boundary for American options. The optimal stopping boundary is needed to evaluate our pathwise derivative expression for gamma and can be used in the integral method to calculate the price and Greeks of American options. Their proposed least-square approach to compute the optimal stopping boundary provides an alternative to the traditional recursive method of solving a system of equations. The authors also incorporate a Brownian bridge in the computation of the Greeks and extend the application of their results to American basket options.
{"title":"Simulating Theta and Gamma of American Options","authors":"P. A. Nguyen, D. Mitchell","doi":"10.2139/ssrn.4109599","DOIUrl":"https://doi.org/10.2139/ssrn.4109599","url":null,"abstract":"This article derives explicit expressions to simulate theta and gamma for American options using the pathwise derivative method. Although the pathwise derivative formulas for delta, rho, and vega of American options have been studied in the literature, no correct explicit results for theta and gamma exist. In addition, the authors propose a simulation-based least-square method to compute the optimal stopping boundary for American options. The optimal stopping boundary is needed to evaluate our pathwise derivative expression for gamma and can be used in the integral method to calculate the price and Greeks of American options. Their proposed least-square approach to compute the optimal stopping boundary provides an alternative to the traditional recursive method of solving a system of equations. The authors also incorporate a Brownian bridge in the computation of the Greeks and extend the application of their results to American basket options.","PeriodicalId":74863,"journal":{"name":"SSRN","volume":"30 1","pages":"74 - 90"},"PeriodicalIF":0.0,"publicationDate":"2023-02-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48843876","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The authors propose a parsimonious yet flexible statistical method for predicting the relative vulnerability or resilience of individual stocks to market drawdowns. The authors’ approach compares a stock’s unique circumstances—as reflected in popular factor attributes—to the circumstances of stocks that have proven vulnerable or resilient to previous market drawdowns. Unlike other approaches, the authors’ method allows the influence of each factor attribute to vary across stocks in a nonlinear, conditional way. The authors test their explicit method for predicting stock vulnerability and resilience out of sample using the five largest market drawdowns since the global financial crisis. The nonlinear composite scores the authors derive are reliably better predictors of cross-sectional return than any of the individual factor attributes or an ex post linear combination of factor attributes.
{"title":"Stock Vulnerability and Resilience","authors":"M. Czasonis, Hui-Qing Song, D. Turkington","doi":"10.2139/ssrn.4214805","DOIUrl":"https://doi.org/10.2139/ssrn.4214805","url":null,"abstract":"The authors propose a parsimonious yet flexible statistical method for predicting the relative vulnerability or resilience of individual stocks to market drawdowns. The authors’ approach compares a stock’s unique circumstances—as reflected in popular factor attributes—to the circumstances of stocks that have proven vulnerable or resilient to previous market drawdowns. Unlike other approaches, the authors’ method allows the influence of each factor attribute to vary across stocks in a nonlinear, conditional way. The authors test their explicit method for predicting stock vulnerability and resilience out of sample using the five largest market drawdowns since the global financial crisis. The nonlinear composite scores the authors derive are reliably better predictors of cross-sectional return than any of the individual factor attributes or an ex post linear combination of factor attributes.","PeriodicalId":74863,"journal":{"name":"SSRN","volume":"49 1","pages":"34 - 44"},"PeriodicalIF":0.0,"publicationDate":"2023-02-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45613309","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
R. Bhargava, Xiaoxia Lou, Gideon Ozik, Ronnie Sadka, Travis Whitmore
This article introduces a media coverage–based approach to quantify narratives and develops methodologies to explain the extent to which narratives drive financial markets and returns of investment portfolios. The authors show that media-derived narratives may contain predictive information for market returns beyond traditional macro indicators. Finally, the authors demonstrate that narrative indicators can be used to enhance asset-allocation strategies and to gain or hedge exposure to narratives by constructing portfolios of narrative-sensitive assets. These findings contribute to our understanding of how narratives influence financial markets and their impact on asset prices.
{"title":"Quantifying Narratives and Their Impact on Financial Markets","authors":"R. Bhargava, Xiaoxia Lou, Gideon Ozik, Ronnie Sadka, Travis Whitmore","doi":"10.2139/ssrn.4166640","DOIUrl":"https://doi.org/10.2139/ssrn.4166640","url":null,"abstract":"This article introduces a media coverage–based approach to quantify narratives and develops methodologies to explain the extent to which narratives drive financial markets and returns of investment portfolios. The authors show that media-derived narratives may contain predictive information for market returns beyond traditional macro indicators. Finally, the authors demonstrate that narrative indicators can be used to enhance asset-allocation strategies and to gain or hedge exposure to narratives by constructing portfolios of narrative-sensitive assets. These findings contribute to our understanding of how narratives influence financial markets and their impact on asset prices.","PeriodicalId":74863,"journal":{"name":"SSRN","volume":"49 1","pages":"82 - 95"},"PeriodicalIF":0.0,"publicationDate":"2023-02-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47429589","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Goal-based wealth management (GBWM) is a portfolio approach in which the investor associates risk with the probability of not attaining a financial goal. Using several datasets, the author examines the performance of a multiperiod GBWM strategy that maximizes the probability of achieving a financial goal. With varying restrictions about leverage and short sales, he compares the goal-based wealth investor with a standard and a goal-attentive mean–variance investor. Without transaction costs, the results suggest that, in terms of goal achievement, a goal-based wealth investor focusing on the probability of reaching a goal does better than a standard mean–variance investor. Compared to a goal-attentive mean–variance investor, the results still favor the goal-based wealth investor but to a lesser extent. With transaction costs, goal-based wealth and goal-attentive mean–variance investors yield similar results in many cases.
{"title":"Maximizing the Probability to Reach the Goal: An Exploration Exercise in Goal-Based Wealth Management","authors":"Jean-Guy Simonato","doi":"10.2139/ssrn.4117979","DOIUrl":"https://doi.org/10.2139/ssrn.4117979","url":null,"abstract":"Goal-based wealth management (GBWM) is a portfolio approach in which the investor associates risk with the probability of not attaining a financial goal. Using several datasets, the author examines the performance of a multiperiod GBWM strategy that maximizes the probability of achieving a financial goal. With varying restrictions about leverage and short sales, he compares the goal-based wealth investor with a standard and a goal-attentive mean–variance investor. Without transaction costs, the results suggest that, in terms of goal achievement, a goal-based wealth investor focusing on the probability of reaching a goal does better than a standard mean–variance investor. Compared to a goal-attentive mean–variance investor, the results still favor the goal-based wealth investor but to a lesser extent. With transaction costs, goal-based wealth and goal-attentive mean–variance investors yield similar results in many cases.","PeriodicalId":74863,"journal":{"name":"SSRN","volume":"49 1","pages":"189 - 207"},"PeriodicalIF":0.0,"publicationDate":"2023-02-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47468495","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The majority of multiasset investment portfolios allocate most of their assets to a mix of stocks and bonds, ostensibly relying on the observed negative correlation between the two asset classes for diversification. Unfortunately, the observed negative correlation between equities and fixed income is not guaranteed to continue. Furthermore, although rates are beginning to rise from historic lows, bonds may take some time to provide satisfactory yields. Equity options may be used to reduce the risk of portfolios, generate income, or both. Historically, options strategies have been out of reach for most investors, but a growing number of exchange-traded funds offer access to option strategy indexes that can provide the potential for material improvements in the risk and reward of portfolios. In this article, the authors introduce a set of option strategy indexes linked to the NASDAQ-100 Index that can be accessed via exchange-traded funds and demonstrate how they can add value to multiasset portfolios.
{"title":"Option-Strategy Indexes: A Powerful Tool for Improving Portfolios","authors":"Efram Slen, Rufus Rankin, Richard Lin, Tony Yiu","doi":"10.2139/ssrn.4289708","DOIUrl":"https://doi.org/10.2139/ssrn.4289708","url":null,"abstract":"The majority of multiasset investment portfolios allocate most of their assets to a mix of stocks and bonds, ostensibly relying on the observed negative correlation between the two asset classes for diversification. Unfortunately, the observed negative correlation between equities and fixed income is not guaranteed to continue. Furthermore, although rates are beginning to rise from historic lows, bonds may take some time to provide satisfactory yields. Equity options may be used to reduce the risk of portfolios, generate income, or both. Historically, options strategies have been out of reach for most investors, but a growing number of exchange-traded funds offer access to option strategy indexes that can provide the potential for material improvements in the risk and reward of portfolios. In this article, the authors introduce a set of option strategy indexes linked to the NASDAQ-100 Index that can be accessed via exchange-traded funds and demonstrate how they can add value to multiasset portfolios.","PeriodicalId":74863,"journal":{"name":"SSRN","volume":"14 1","pages":"60 - 77"},"PeriodicalIF":0.0,"publicationDate":"2023-01-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45360890","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Alternative Risk Premia (ARP) investment products have attracted substantial interest from institutional investors in the recent decade, as they are supposed to provide risk premia other than traditional equity and bond premia, to which investors already have exposure. This article reviews the performance of ARP products available to investors, in the form of investment bank indices that provide exposure to individual ARP strategies and of asset manager diversified multi-strategy ARP funds. Our results suggest that, as standalone investments, ARP so far have failed to provide the expected results. Their performance has been generally negative, and they also have suffered from large losses during equity market drawdowns. Even though they do not provide high positive returns, however, some ARP show risk-return profiles that could be valuable, especially for risk-mitigation purposes, when incorporated into balanced portfolios with exposures to traditional risk premia.
{"title":"Alternative Risk Premia and Market Drawdowns: A Performance Review","authors":"Francesc Naya, Jahja Rrustemi, Nils S. Tuchschmid","doi":"10.2139/ssrn.4173067","DOIUrl":"https://doi.org/10.2139/ssrn.4173067","url":null,"abstract":"Alternative Risk Premia (ARP) investment products have attracted substantial interest from institutional investors in the recent decade, as they are supposed to provide risk premia other than traditional equity and bond premia, to which investors already have exposure. This article reviews the performance of ARP products available to investors, in the form of investment bank indices that provide exposure to individual ARP strategies and of asset manager diversified multi-strategy ARP funds. Our results suggest that, as standalone investments, ARP so far have failed to provide the expected results. Their performance has been generally negative, and they also have suffered from large losses during equity market drawdowns. Even though they do not provide high positive returns, however, some ARP show risk-return profiles that could be valuable, especially for risk-mitigation purposes, when incorporated into balanced portfolios with exposures to traditional risk premia.","PeriodicalId":74863,"journal":{"name":"SSRN","volume":"14 1","pages":"83 - 100"},"PeriodicalIF":0.0,"publicationDate":"2023-01-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48446818","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Whether households prefer a constant, increasing, or decreasing path of consumption in retirement has important implications for our understanding of retirement adequacy. Financial planners and researchers often have assumed that retirees would like to maintain their pre-retirement standard of living. However, several studies suggest that retired households decrease their consumption over time. This project builds on the existing literature by: 1) examining retirement consumption over longer periods; 2) using wealth to separate constrained and unconstrained households in order to analyze whether declines in consumption are driven by necessity or preferences; and 3) exploring whether, within unconstrained households, those with steeper mortality profiles are more likely to front-load consumption.
{"title":"Do Retirees Want Constant, Increasing, or Decreasing Consumption?","authors":"Anqi Chen, A. Munnell","doi":"10.2139/ssrn.3979740","DOIUrl":"https://doi.org/10.2139/ssrn.3979740","url":null,"abstract":"Whether households prefer a constant, increasing, or decreasing path of consumption in retirement has important implications for our understanding of retirement adequacy. Financial planners and researchers often have assumed that retirees would like to maintain their pre-retirement standard of living. However, several studies suggest that retired households decrease their consumption over time. This project builds on the existing literature by: 1) examining retirement consumption over longer periods; 2) using wealth to separate constrained and unconstrained households in order to analyze whether declines in consumption are driven by necessity or preferences; and 3) exploring whether, within unconstrained households, those with steeper mortality profiles are more likely to front-load consumption.","PeriodicalId":74863,"journal":{"name":"SSRN","volume":"10 1","pages":"6 - 25"},"PeriodicalIF":0.0,"publicationDate":"2023-01-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48173777","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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