Equity index collar strategies are often perceived as a way for investors, at little to no cost, to exchange some upside exposure for reduced losses on the downside. That perception may be accurate if one considers only the net dollar cost of the strategy's initial option trades, but it fails to...

We investigate the effect of including variance derivatives as calibration and hedging instruments for pricing and hedging exotic structures. This is studied empirically using market data for SPX and VIX derivatives applied in a stochastic volatility jump diffusion model

Stocks with high idiosyncratic volatility perform poorly relative to low idiosyncratic volatility stocks. We offer a novel explanation of this anomaly based on real options, which is consistent with earlier findings on idiosyncratic volatility (the positive contemporaneous relation between...

In the data, stock market volatility negatively predicts short-run equity and variance risk premia, at odds with leading asset pricing models. I show that only infrequent large volatility shocks negatively drive risk premia, whereas the predictability is strongly positive at all other times. I...

We study a continuous-time pure exchange economy where idiosyncratic cash flow risks are priced via investors' heterogeneous beliefs. Investors perceive idiosyncratic cash flow risks differently through heterogeneous subjective mean growth rates on a firm's cash flow. This impacts equilibrium...

We give an explicit algorithm and source code for constructing risk models based on machine learning techniques. The resultant covariance matrices are not factor models. Based on empirical backtests, we compare the performance of these machine learning risk models to other constructions,...

We discuss how to build ETF risk models. Our approach anchors on i) first building a multilevel (non-)binary classification/taxonomy for ETFs, which is utilized in order to define the risk factors, and ii) then building the risk models based on these risk factors by utilizing the heterotic risk...

Investor aversion to extreme losses may motivate them to seek out investments perceived to function as a safe haven during times of crisis. In this study, we consider the potential for precious metals to mitigate downside risk when combined with equities, and evaluate the impact on portfolio...

This paper explores asset pricing implications of unemployment risk from sectoral shifts. I proxy for this risk using cross-industry dispersion (CID), defined as a mean absolute deviation of returns of 49 industry portfolios. CID peaks during periods of accelerated sectoral reallocation and...

The topics of Economic Capital modelling, reverse stress testing and credit limits are inextricably intertwined as they all focus on exceptional loss events. In this paper, we use the KVA framework in to frame these three topics within a single unified approach. We propose setting credit limits...