Hello all,

– Parametrization of the One Day Shocks & 100yrs Historical Events, Volatility Targeting, Correlation Analysis, and Portfolio Rebalancing reports
– 20 new Quantpedia Premium strategies have been added to our database
– 5 new related research papers have been included in existing Premium strategies during the last month
– Additionally, we have produced 7 new backtests written in QuantConnect code
– 5 new blog posts that you may find interesting have been published on our Quantpedia blog in the previous month
– Plus you are all invited to a new Quantpedia webinar – Unlocking the Power of Calendar and Seasonal Strategies

Gold has been in the headlines lately as it climbs to new highs, prompting many investors to look for ways to benefit from the rally. However, many institutional investors – such as mutual funds and pension funds – face restrictions on buying physical gold or gold-backed ETFs. Instead, they often turn to gold mining stocks to gain indirect exposure to gold’s price. That approach seems logical on the surface: mining stocks typically offer leveraged exposure to gold’s movements. But as highlighted by Dirk G. Baur, Allan Trench, and Lichoo Tay in their recent study “Gold Shares Underperform Gold Bullion”, this strategy can be misleading. The authors demonstrate that, over the long run, gold mining shares structurally underperform physical gold itself.

Extreme market events, once perceived as statistical outliers, have become a central concern for investors. The persistence of sharp drawdowns and volatility spikes demonstrates that the cost of ignoring tail risks is not tolerable for long-term portfolio resilience. While diversification can mitigate ordinary fluctuations, it often fails when markets move in unison under stress. This makes explicit protection against severe downside events not just desirable but necessary. Tail hedging addresses this need by providing a structured defense against the most damaging scenarios, ensuring that portfolios remain robust when traditional risk management tools fall short. Using VIXY ETF, we will present and test a range of hedging strategies designed to protect portfolios under stress. By applying robust testing frameworks, we aim to evaluate how different implementations of VIXY ETF-based tail hedges perform across a variety of market environments, highlighting both their strengths and inherent trade-offs.

Currency strategies often appear simple on the surface – go long high-yielding currencies, short low-yielding ones, or take a position on the U.S. dollar. But these trades actually mix two distinct components: a Dollar component, which bets on broad movements of the U.S. dollar against all others, and a Cross-Sectional (CS) component, which exploits relative differences across countries. The question is, which of these components really drives currency risk premia? A new paper by Vahid Rostamkhani tackles this long-standing question by decomposing the predictive power of eleven macroeconomic fundamentals—such as interest rates, inflation, unemployment, and fiscal variables—into these two components across almost a century of data (1926-2023). This approach directly tests whether it is more rewarding to time the dollar itself or to focus on cross-country fundamental spreads.

Leveraged ETFs (such as SPXL – (Direxion Daily S&P 500 Bull 3X Shares) offer amplified exposure to the S&P 500, promising high returns but exposing investors to volatility drag caused by daily rebalancing. This effect can significantly erode performance over longer horizons, particularly during periods of elevated market volatility. Inspired by recent research, The Volatility Edge, A Dual Approach For VIX ETNs Trading, focused on volatility-linked ETNs, we propose a volatility filter that adjusts ETF exposure based on the relationship between short-term realized volatility and implied volatility. By reducing exposure in high-volatility periods and maintaining it in calmer markets, this approach aims to harness leverage effectively while mitigating the most damaging drawdowns.

The Excess Bond Premium (EBP – the portion of corporate bond spreads not explained by default risk), a key metric in quantitative finance for gauging credit spreads, has long been a subject of intense scrutiny. Recent research sheds new light on its dynamics, moving beyond traditional macroeconomic factors to explore the role of information flow. By analyzing news attention across 180 topics, a significant portion of the EBP’s variation can be explained, offering a novel lens to understand its fluctuations and predictive power.