Christian S. Pedersen, Stephen E. Satchell, Small Sample Analysis of Performance Measures in the Asymmetric Response Model, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 3 (Sep., 2000), pp. 425-450

This paper proposes an unobserved fundamental component of volatility as a measure of risk. This concept of fundamental volatility may be more meaningful than the usual measures of volatility for market regulators. Fundamental volatility can be obtained using a stochastic volatility model, which allows us to `filter’ out the signal in the volatility information. We decompose four FTSE100 stock index related volatilities into transitory noise and unobserved fundamental volatility. Our analysis is applied to the question as to whether derivative markets destabilise asset markets. We find that introducing European options reduces fundamental volatility, while transitory noise in the underlying and futures markets does not show significant changes. We conclude that, for the FTSE100 index, introducing a new options market has stabilised both the underlying market and existing derivative markets.

In this paper, we investigate value creation by hedge funds using Berk and van Binsbergen's (2015) value-added. We find that, on average, a hedge fund manager extracts $0.76 million per month from the market. We provide strong evidence of persistence in value creation by hedge fund managers. Of three skill indicators—skill ratio, fee ratio, and total compensation—we find that total compensation best identifies the skilled manager out-of-sample. Investors in value-creating funds benefit from a better risk–return payoff. While hedge funds operate in a less competitive market than mutual funds, incentive fees do not indicate greater skill. The value that hedge funds can extract from the market depends on both the profitability and scalability of the investment strategy.

While momentum benefits from persistent trends of the market, such strategies are unable to distinguish between upside and downside risk and suffer consequently. We propose a Partial Moment Momentum (PMM) trading strategy that is sensitive to the sign of risk and show risk-adjusted outperformance compared to plain momentum and volatility-adjusted momentum strategies. The outperformance is robust across multiple time periods and in particular during market downturns. Further analysis based on conventional linear factor models shows negligible exposure to factor risk for our PMM portfolio. Finally, the performance of our proposed strategy appears to be enhanced when time series momentum is present and allows for improved risk management by distinguishing between upside and downside risks.

This paper investigates the presence of global style factors in global equity investment. To this end, we apply Bayesian variable selection methods from the statistics literature to give guidance in the decision to include/omit factors in a global (linear factor) stock return model. Once we have accounted for country and sector, it is possible to see which style or styles best explains current asset returns. This study does not find compelling evidence for global styles as useful explanatory factors in a fixed parameter regression model, once country and sector have been accounted for.

Abstract Efficient investment of personal savings depends on clear risk disclosures. We study the propensity of individuals to violate some implications of expected utility under alternative “mass-market” descriptions of investment risk, using a discrete choice experiment. We found violations in around 25% of choices, and substantial variation in rates of violation, depending on the mode of risk disclosure and participants’ characteristics. When risk is described as the frequency of returns below or above a threshold we observe more violations than for range and probability-based descriptions. Innumerate individuals are more likely to violate expected utility than those with high numeracy. Apart from the very elderly, older individuals are less likely to violate the restrictions. The results highlight the challenges of disclosure regulation.