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New related paper to #20 - Volatility Risk Premium Effect Friday, 5 June, 2015

#20 - Volatility Risk Premium Effect

Authors: Li, Wang

Title: Option-Implied Downside Risk Premiums

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2603857

Abstract:

This article examines downside risk premiums using S&P 500 index (SPX) options. Portfolios are constructed using the index options to replicate the downside risk factors and their average excess returns provide estimates of downside risk premiums. We show that all the market risk premium comes from the downside. The mimicking portfolio returns also show that most of the downside risk premium is associated with large market-level losses that are rarely observed. In contrast, investors seem to require little excess return for bearing moderate market-level losses. Therefore, the downside risk premium is largely a tail risk premium. We compare the downside risk premiums measured from stocks and the options to examine whether the risk is priced consistently across the two markets. Our evidence raises several concerns about the downside risk premium measures from the stock market. Overall, we find no robust evidence that downside risks are priced in the stock market in the same way as in the options market.

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Additional interesting paper related to several momentum strategies Tuesday, 2 June, 2015

#8 - FX Momentum
#14 - Momentum Effect in Stocks

#21 - Momentum Effect in Commodities

#118 - Time Series Momentum Effect

Authors: Goyal, Jagadeesh

Title: Cross-Sectional and Time-Series Tests of Return Predictability: What Is the Difference?

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2610288

Abstract:

We analyze the differences between past-return based strategies that differ in conditioning on past returns in excess of zero (time-series strategy, TS) and past returns in excess of the cross-sectional average (cross-sectional strategy, CS). We find that the return difference between these two strategies is mainly due to time-varying long positions that the TS strategy takes in the aggregate market and, consequently, do not have any implications for the behavior of individual asset prices. However, TS and CS strategies based on financial ratios as predictors are sometimes different due to asset selection.

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Amazing paper related to several momentum strategies Thursday, 28 May, 2015

#2 - Asset Class Momentum - Rotational System
#3 - Sector Momentum - Rotational System
#8 - FX Momentum

#14 - Momentum Effect in Stocks

#15 - Momentum Effect in Country Equity Indexes

Authors: Geczy, Samonov

Title: 215 Years of Global Multi-Asset Momentum: 1800-2014 (Equities, Sectors, Currencies, Bonds, Commodities and Stocks)

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607730

Abstract:

Extending price return momentum tests to the longest available histories of global financial asset returns, including country-specific sectors and stocks, fixed income, currencies, and commodities, as well as U.S. stocks, we create a 215-year history of multi-asset momentum, and we confirm the significance of the momentum premium inside and across asset classes. Consistent with stock-level results, we document a large variation of momentum portfolio betas, conditional on the direction and duration of the return of the asset class in which the momentum portfolio is built. A significant recent rise in pair-wise momentum portfolio correlations suggests features of the data important for empiricists, theoreticians and practitioners alike.

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New related paper to #6 & #7 - Volatility Effect in Stocks and #20 - Volatility Risk Premium Effect Tuesday, 26 May, 2015

#6 - Volatility Effect in Stocks - Long-Short Version
#7 - Volatility Effect in Stocks - Long-Only Version
#20 - Volatility Risk Premium Effect

Authors: Ilmanen

Title: Do Financial Markets Reward Buying or Selling Insurance and Lottery Tickets?

Link: https://www.aqr.com/~/media/files/papers/faj-do-financial-markets-reward-buying-or-selling-insurance-and-lottery-tickets.pdf

Abstract:

Selling financial investments with insurance or lottery characteristics should earn positive longrun premiums if investors like positive skewness enough to overpay for these characteristics. The empirical evidence is unambiguous: Selling insurance and selling lottery tickets have delivered positive long-run rewards in a wide range of investment contexts. Conversely, buying financial catastrophe insurance and holding speculative lottery-like investments have delivered poor longrun rewards. Thus, bearing small risks is often well rewarded, bearing large risks not.

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New related paper to #237 - Dispersion Trading Thursday, 21 May, 2015

#237 - Dispersion Trading

Authors: Deng

Title: Volatility Dispersion Trading

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1156620

Abstract:

This papers studies an options trading strategy known as dispersion strategy to investigate the apparent risk premium for bearing correlation risk in the options market. Previous studies have attributed the profits to dispersion trading to the correlation risk premium embedded in index options. The natural alternative hypothesis argues that the profitability results from option market inefficiency. Institutional changes in the options market in late 1999 and 2000 provide a natural experiment to distinguish between these hypotheses. This provides evidence supporting the market inefficiency hypothesis and against the risk-based hypothesis since a fundamental market risk premium should not change as the market structure changes.

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