In this paper we realize an early warning system for hedge funds based on specific red flags that help to detect symptoms of impending extreme negative returns and contagion effect. To do this we rely on regression trees analysis identifying a series of splitting rules which act as risk signals....

This paper focuses on predictability of sovereign debt crisis proposing a two-step procedure centered on the idea of a multidimensional distance-to-collapse point. The first step is non-parametric and devoted to constructing a generalized early warning system that signals a potential crisis. The...

Suppose a fund manager uses predictors in changing portfolio allocations over time. How does predictability translate into portfolio decisions? To answer this question we derive a new model within the Bayesian framework, where managers are assumed to modulate the systematic risk in part by...