Estimation of the covariance matrix of asset returns is crucial to portfolio construction. As suggested by economic theories, the correlation structure among assets differs between emerging markets and developed countries. It is therefore imperative to make rigorous statistical inference on...

In portfolio risk minimization, the inverse covariance matrix prescribes the hedge trades in which a stock is hedged by all the other stocks in the portfolio. In practice with finite samples, however, multicollinearity makes the hedge trades too unstable and unreliable. By shrinking trade sizes...

This paper motivates a novel predictor of currency returns and exchange rate changes, the lagged foreign interest rate. This variable is the dividend-to-price analogue in currency markets and its forecasting ability is incremental to established predictors. Currency-return predictability is...

Conducting a Beveridge-Nelson decomposition on exchange rates reveals that the prospective interest rate differential -- the expected infinite sum of future interest rate differentials (i.e., the "prospective'') -- can help predict foreign exchange market excess returns. We find that the...