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White Paper

When Stock-Bond Diversification Fails

The events of 2020 to 2021 have increased uncertainty around the future path of inflation. We review how different inflationary outcomes can impact investor portfolios and evaluate what assets and strategies may enhance portfolio resilience to inflation.

Working Paper

Sustainable Systematic Credit

Interest in sustainable investing is now expanding into fixed income. This paper assesses how measures of sustainability/ESG might be relevant for corporate bonds and analyzes how ESG measures can be incorporated into an investment process to achieve the joint object of maximizing risk-adjusted returns and a sustainability target.

Working Paper

Modeling Corporate Bond Returns

We propose a new conditional factor model for corporate bond returns with four factors and time-varying factor loadings instrumented by observable bond characteristics. We find our factor model excels in describing the risks and returns of corporate bonds, improving over previously proposed models in the literature by a large margin.

Working Paper

Climate Finance

The paper reviews the literature studying interactions between climate change and financial markets, including various approaches to incorporating climate risk in macro-finance models as well as the empirical literature that explores the pricing of climate risks across several asset classes.

Alternative Thinking

Was That Intentional? Ways to Improve Your Active Risk

Investors try to outperform their strategic asset allocation benchmarks by taking active risks. Some of these are intentional, but others are low-conviction or even unintentional, which can be a large part of a portfolio’s total active risk. When it comes to beating a strategic asset allocation benchmark, reducing these unintentional active risks may among the clearest sources of “low hanging fruit”.

Journal Article

Tail Risk Hedging: Contrasting Put and Trend Strategies

The sharp market fall and speedy recovery during the eventful first half of 2020 has kept tail risk hedging topical: investors have both fresh memories of a painful loss and renewed fears of a repeat. We try to offer a balanced overview of the strengths and weaknesses of direct and indirect tail hedging strategies.

Journal Article

Portfolio Protection? It’s a Long (Term) Story…

Investors have a natural urge to protect their portfolios from sudden crashes, even though bad outcomes that unfold over longer periods are more detrimental to reaching long-term goals. We show risk-mitigating and diversifying strategies have added value more consistently than options-based hedging over the more important, longer drawdowns.

Journal Article

(Systematic) Investing in Emerging Market Debt

We extend the analysis of systematic investment approaches to emerging market (EM) fixed income. We find that systematic exposures linked to carry, defensive, momentum and valuation themes are well compensated and lowly correlated in EM markets, and that a systematic approach to EM debt may be a powerful diversifier.

White Paper

Enhanced Portfolio Optimization

We show how to identify the portfolios that cause problems in standard mean-variance optimization (MVO) and develop an enhanced portfolio optimization (EPO) method that addresses the problems. Applying EPO on several realistic datasets, we find significant gains relative to standard benchmarks.

Perspective

The Illiquidity Discount?

Conventional wisdom is you get an expected return premium for bearing illiquidity. But what if this is backwards? What if investors will actually pay a higher price and accept a lower expected return for very illiquid assets?