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Commodities as Financial Assets.
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Prediction Company: The Business of Model-Based Trading.
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The FED Model and expected asset returns.
Abstract: The earnings yield and long-term bond yields have been widely used to predict asset returns. In this paper, I focus on the predictive role of the stock-bond “yield gap” – the difference between the earnings yield and the 10 year Treasury bond yield – also know as the FED model, and which can be interpreted as a long term yield spread of stocks relative to bonds. Conditional on other forecasting variables, the yield gap forecasts positive excess stock returns, both at short and long forecasting horizons, although the forecasting power is greater at the near horizons. On the other hand, the yield gap forecasts negative excess returns for bonds, at both short and long horizons. A VAR variance decomposition for stock market returns, shows that shocks in the yield gap are highly positively correlated with innovations in both future discount-rate and cash flow news, confirming that the spread conveys information about future earnings and returns. An investment strategy based on the forecasting ability of the Yield gap produces higher Sharpe ratios than passive strategies in both the market index and long–term bond. In the context of an equilibrium multifactor ICAPM, the yield gap has some explanatory power over the cross section of stock returns.
Keywords: FinanceGeneral
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U.S. ETF Family Tree. Bespoke Investment Group.
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2008. Alpha Hall of Fame.
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Abrams, R., Bhaduri, R. & Flores, E.. Litner Revisited: A Quantitative Analysis of Managed Futures in an Institutional Portfolio. CME Group.
Abstract: Managed futures comprise a wide array of liquid, transparent alpha strategies which offer institutional investors a number of benefits. These include cash efficiency, intuitive risk management, and a proclivity toward strong performance in market environments that tend to be difficult for other investments. This paper revisits Dr. John Lintner’s classic 1983 paper, “The Potential Role of Managed Commodity-Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and Bonds,” which explored the substantial diversification benefits that accrue when managed futures are added to institutional portfolios. As Dr. Lintner did, it analyzes the portfolio benefits that managed futures offer through the mean-variance framework, but it draws on more complete techniques such as the analysis of omega functions to assess portfolio contribution. The paper also conducts a comparative qualitative and quantitative analysis of the risk and return opportunities of managed futures relative to other investments, and includes a discussion as to why managed futures strategies tend to perform well in conditions that are not conducive to other investment strategies. It provides an overview of the diversity of investment styles within managed futures, dispelling the commonly held notion that all CTAs employ trend following strategies. Finally, it highlights the opportunities the space offers to institutional investors seeking to create well-diversified, liquid, transparent, alpha portfolios.
Keywords: FinanceGeneral
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Alexander, C. & Dimitriu, A., 2008. The Cointegration Alpha: Enhanced Index Tracking and Long-Short Equity Market Neutral Strategies.
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Ang, A., Bekaert, G. & Wei, M., 2006. Do Macro Variables, Asset Markets, or Surveys Forecast Inflation Better?.
Abstract: Surveys do! We examine the forecasting power of four alternative methods of forecasting U.S. inflation out-of-sample: time-series ARIMA models; regressions using real activity measures motivated from the Phillips curve; term structure models that include linear, non-linear, and arbitrage-free specifications; and survey-based measures. We also investigate several methods of combining forecasts. Our results show that surveys outperform the other forecasting methods and that the term structure specifications perform relatively poorly. We find little evidence that combining forecasts produces superior forecasts to survey information alone. When combining forecasts, the data consistently places the highest weights on survey information.
Keywords: FinanceGeneral
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