Forecasting Financial Markets

WHAT WE DO

 

Unit Director: Massimo Guidolin

 

Recently the unit has been focussing on the following related topics:

 

1. SEGMENTATION AND LOCAL PRICING FACTORS IN THE COMMODITIES MARKET

The goal of the project is to estimate and compare stochastic discount factor models -- hence ruling out arbitrage opportunities -- that include vs. do not include "local" (i.e., specific to commodity markets only) factors, such as Average (Level), Carry, and Momentum as featured in recent research.

 

2. MODELLING AND FORECASTING REGIME SHIFTS IN THE DYNAMIC RELATIONSHIP BETWEEN SOVEREIGN BOND BASE AND CDS PREMIA

It is well known that a long-run relationships should tie down the risk premium on government bonds and the CDS premium for an identical maturity credit default swap that allows an investor to hedge against default risk. Empirically, such a relationship is violated for a number of rational reasons (among them, liquidity and convenience yields of holding bonds vs. just purchasing naked CDS protection) that are found to be time-varying. The goal of the project is to model and forecast deviations from such a no arbitrage relation in a regime switching framework.

 

3. CROSS-ASSET CONTAGION IN TIMES OF CRISIS

Motivated by the recent U.S. subprime crisis that provides a clean exogenous shock in a specific market (low-grade mortgage-backed asset security market), the objective is to empirically characterize the patterns through which shocks to different assets propagate across markets (e.g., ABS higher grade, Treasury repo, Treasury bond, corporate bond, and stock markets).

 

4. WHAT IS TRUE RISK-ADJUSTED BENEFIT OF HEDGE FUNDS: A SYSTEMATIC ASSET ALLOCATION PERSPECTIVE

To assess the often claimed out-performance of hedge fund investments, the project explores the benefits from investing in a range of hedge fund strategies for a long-horizon risk-averse investor who is already well diversified across stocks, REITs, and government and corporate debt. We plan a range of recursive out-of-sample experiments similarly to recent papers by Guidolin and Hyde (2012, 2014)  and Bianchi and Guidolin (2014).