We study market-timing strategies on a given portfolio to achieve a particular risk or return target. Targeting a constant risk level leads to increasing investment at better investment opportunities whereas targeting a constant expected return does the opposite. Theoretical and numerical...

Classic option pricing theory values a derivative contract via dynamic replication, and views the derivative as redundant relative to the replicating portfolio. In practice, while dynamic replication proves highly effective in drastically reducing the risk in derivative investments, the...

We model term structure dynamics using a recursive cascade of heterogeneously persistent factors. The cascade naturally orders the factors by their adjustment speeds, and generates smooth zero-coupon bond prices and forward curves in closed form. For a class of specifications, the number of...

Most existing hedging theories are derived under strong, idealistic assumptions on both the underlying security price dynamics and the trading environments. Practical concerns such as contract availability, transaction cost, and uncertainty regarding the security price dynamics impose severe...

Economic theory suggests that the magnitude and direction of a company's currency risk exposure depends crucially on its fundamental involvement in international trade. For U.S. industries, we find that the stock performance of import-oriented companies moves positively with the performance of...

Most existing hedging approaches are based on neutralizing risk exposures defined under a pre-specified model. This paper proposes a new, simple, and robust hedging approach based on the affinity of the derivative contracts. As a result, the strategy does not depend on assumptions on the...

We develop a new option pricing framework that tightly integrates with how institutional investors manage options positions. The framework starts with the near-term dynamics of the implied volatility surface and derives no-arbitrage constraints on its current shape. Within this framework, we...

Asset pricing tests often replace ex ante return expectation with ex post realization. The large deviation between the two drastically weakens the power of these tests. This paper proposes to use analysts consensus price target for a stock as the market expectation of the stock's future price to...