Regime switching models can match the tendency of financial markets to often change their behavior abruptly and the phenomenon that the new behavior of financial variables often persists for several periods after such a change. While the regimes captured by regime switching models are identified...

Regime-switching models can match the tendency of financial markets to often change their behavior abruptly and the phenomenon that the new behavior of financial variables often persists for several periods after such a change. Although the regimes captured by regime-switching models are...

Traditionally, “real” assets such as inflation-indexed bonds, commodities and real estate were thought to have correlate well with inflation and thus provide protection against rising price levels. But many of these assets turn out not to be that “real.” While a single real bond provides...

Mean-variance investing is all about diversification. Diversification considers assets holistically and exploits the interaction of assets with each other, rather than viewing assets in isolation. Holding a diversified portfolio allows investors to increase expected returns while reducing risks....

We survey the academic literature that examines the risks and returns of private equity (PE) investments, optimal PE allocation, and compensation contracts for PE firms. The irregular nature and limited data of PE investments complicate the estimation and interpretation of standard risk and...

Equities have exhibited high returns relative to bonds and cash (bills) historically. The equity risk premium is a reward for bearing losses during bad times, where the risks of bad times are defined by low consumption growth, disasters, or long-run risks. Other investor characteristics...

The foundation for a long-term investment strategy is rebalancing to fixed asset class positions, which are determined in a one-period portfolio choice problem where the asset weights reflect the investor's attitude toward risk. Rebalancing is a counter-cyclical strategy that has worked well...

Asset owners (principals) typically do not manage their own investments and leave this job to delegated managers (agents). What is best for the asset owner, however, is usually not best for the fund manager. Additional agency conflicts arise when the asset owner does not know the quality and...

We study the nature of systemic sovereign credit risk using CDS spreads for the U.S. Treasury, individual U.S. states, and major Eurozone countries. Using a multifactor affine framework that allows for both systemic and sovereign-specific credit shocks, we find that there is much less systemic...

We estimate the effect of shifts in monetary policy using the term structure of interest rates. In our no-arbitrage model, the short rate follows a version of the Taylor (1993) rule where the coefficients on the output gap and inflation vary over time. The monetary policy loading on the output...