- 106 Bunhill Row
London EC1Y 8TZ
UK
Ana-Maria Fuertes
City, University of London, Faculty of Finance, Faculty Member
- Professor in Finance and Econometrics at Cass Business School, City, University of Londonedit
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This paper studies the link between individual investors’ portfolio diversification levels and various personal traits that proxy informational advantages and overconfidence. The analysis is based on objective data from the largest... more
This paper studies the link between individual investors’ portfolio diversification levels and various personal traits that proxy informational advantages and overconfidence. The analysis is based on objective data from the largest Turkish brokerage house tracking 59,951 individual investors’ accounts with a total of 3,248,654 million transactions over the period 2008–2010. Wealthier, highly educated, older investors working in the finance sector and those trading relatively often show higher diversification levels possibly because they are better equipped to obtain and process information. Finance professionals, married investors, and those placing high-volume orders through investment centers show poorer diversification possibly as a reflection of overconfidence. Our analysis reveals important nonlinear effects, implying that the marginal impact of overconfidence on diversification is not uniform across investors but varies according to the investor's information gathering and processing abilities.
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This paper studies the energy futures risk premia that can be extracted through long-short portfolios that exploit heterogeneities across contracts as regards various characteristics or signals and integrations thereof. Investors can earn... more
This paper studies the energy futures risk premia that can be extracted through long-short portfolios that exploit heterogeneities across contracts as regards various characteristics or signals and integrations thereof. Investors can earn a sizeable premium of about 8% and 12% per annum by exploiting the energy futures contract risk associated with the hedgers’ net positions and roll-yield characteristics, respectively, in line with predictions from the hedging pressure hypothesis and theory of storage. Simultaneously exploiting various signals towards style-integration with alternative weighting schemes further enhances the premium. In particular, the style-integrated portfolio that equally weights all signals stands out as the most effective. The findings are robust to transaction costs, data mining and sub-period analyses.
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cemmap course April-May 2009 Traditionally economic panels had large number of cross-section units and relatively few time periods and econometric methods were developed for such ‘large N small T ’data. More recently panels with... more
cemmap course April-May 2009 Traditionally economic panels had large number of cross-section units and relatively few time periods and econometric methods were developed for such ‘large N small T ’data. More recently panels with observations for a large numbers of time periods have become available on cross-section units like …rms, industries, regions or countries. These notes explore the econometric methods developed for such ‘large N large T ’ data. Such data allow more explicit treatment of (a) heterogeneity across units (b) dynamics, including the treatment of unit roots and cointegration and (c) cross-section dependence arising from spatial interactions or unobserved
This paper investigates the role of intraday prices and volume to generate daily volatility forecasts used for individual stock trading. The analysis is based on a 7-year sample of transaction prices for 14 NYSE stocks. Volatility... more
This paper investigates the role of intraday prices and volume to generate daily volatility forecasts used for individual stock trading. The analysis is based on a 7-year sample of transaction prices for 14 NYSE stocks. Volatility forecasts are obtained from daily returns in a GARCH equation which is augmented with several nonparametric intraday volatility measures or with volume. The overall results from various trading strategies suggest that the use of high frequency price data is not pro
table. The baseline GARCH forecasts outperform the intraday price augmented GARCH forecasts. However, the information content in trading activity can enhance pro
ts. The best performing strategies involve buying the stock when its forecasted volatility is extremely high, suggesting a stronger volatility-return relationship in turbulent periods.
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This paper explores several nonlinear aspects in the interest rate transmission mechanism on the basis of a large disaggregated sample of British monthly deposit and loan rates 1993- 2005 for seven key products. The focus is on the... more
This paper explores several nonlinear aspects in the interest rate transmission mechanism on the basis of a large disaggregated sample of British monthly deposit and loan rates 1993- 2005 for seven key products. The focus is on the adjustment speed towards the long run equilibrium rate. A sizeable proportion of UK deposits and credit products are found to have a
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This paper explores the interest rate transmission mechanism on the basis of a large disaggregated sample of British monthly deposit and loan rates 1993-2005 for seven key products. The focus is on the adjustment speed towards the long... more
This paper explores the interest rate transmission mechanism on the basis of a large disaggregated sample of British monthly deposit and loan rates 1993-2005 for seven key products. The focus is on the adjustment speed towards the long run equilibrium rate. A sizeable proportion of UK deposits and credit products are found to have a time-varying adjustment speed, driven by the change in the policy rate. Tests based on regime-switching models indicate that the adjustment speed has four states defined by the sign of the policy rate change and the sign of the gap. The magnitude of changes in the policy rate also influences the adjustment speed in a regime-switching manner, but this nonlinear aspect is less pervasive across products than the sign asymmetry. Furthermore, mainly for deposit products there is curvature in the catch-up effect towards equilibrium ⎯ the error correction is disproportionately larger for big gaps. The marked heterogeneity found across financial institutions and...
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Are Islamic banks inherently more stable than conventional banks? This question is addressed using duration models that take into account both the occurrence of and the time-to-failure of 421 banks in 20 countries in the period 1995 -... more
Are Islamic banks inherently more stable than conventional banks? This question is addressed using duration models that take into account both the occurrence of and the time-to-failure of 421 banks in 20 countries in the period 1995 - 2010. By comparing estimates of hazard rates for both bank types, we find that Islamic banks have a significantly lower risk of failure both unconditionally and conditionally on time-varying bank characteristics, market structure and macroeconomic conditions. The higher survival rates of Islamic banks are more strongly tied than those of conventional peers to their own liquidity position, leverage, banking sector concentration and macroeconomic conditions. The design and implementation of early warning systems of bank failure should therefore recognize the distinct risk profiles of the two bank types.
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This paper examines the combined role of momentum and term structure signals for the design of profitable trading strategies in commodity futures markets. With significant annualized alphas of 10.14 % and 12.66 % respectively, the... more
This paper examines the combined role of momentum and term structure signals for the design of profitable trading strategies in commodity futures markets. With significant annualized alphas of 10.14 % and 12.66 % respectively, the momentum and term structure strategies appear profitable when implemented individually. With an abnormal return of 21.02%, a novel double-sort strategy that exploits both momentum and term structure signals clearly outperforms the single-sort strategies. This double-sort strategy can additionally be utilized as a portfolio diversification tool. Interestingly, the abnormal performance of the double-sort portfolios cannot be explained by a lack of liquidity or data mining and is robust to transaction costs and to different specifications of the risk-return trade-off.
The base currency effect in the purchasing power parity (PPP) literature refers to the stylized fact that tests on German mark real exchange rates are more likely to support mean reversion than analogous tests on US dollar rates. Using a... more
The base currency effect in the purchasing power parity (PPP) literature refers to the stylized fact that tests on German mark real exchange rates are more likely to support mean reversion than analogous tests on US dollar rates. Using a panel of 19 OECD currencies, 1973-1997, we employ different panel unit root approaches to investigate the view that this effect can be attributed to neglected cross-sectional dependence. While the results from panel methods which permit cross-sectional dependence and heterogeneous serial correlation generally support long-run PPP, they provide no evidence of a base currency effect. Copyright © 2000 John Wiley & Sons, Ltd. KEY WORDS: cross-sectional dependence; panel unit root tests; real exchange rates
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The paper examines the role of non-normality risks in explaining the momentum puzzle of equity returns. It shows that momentum returns are not normally distributed. About 70 basis points of the annual momentum profits can be attributed to... more
The paper examines the role of non-normality risks in explaining the momentum puzzle of equity returns. It shows that momentum returns are not normally distributed. About 70 basis points of the annual momentum profits can be attributed to systematic skewness risk. This finding is pervasive across nine strategies and is reinforced when time dependencies in abnormal returns and risks are explicitly modeled. The analysis also reveals that the market and skewness risks of momentum portfolios evolve over the business cycle in a manner that is consistent with market timing and risk aversion. While the momentum puzzle still remains, these findings are in line with market efficiency.
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The hedging pressure hypothesis contends that commodity futures prices depend on the net positions of hedgers. This paper adopts a time-series and cross-sectional analysis to revisit this hypothesis in the context of commodity markets and... more
The hedging pressure hypothesis contends that commodity futures prices depend on the net positions of hedgers. This paper adopts a time-series and cross-sectional analysis to revisit this hypothesis in the context of commodity markets and additionally to test its empirical validity in equity, currency and fixed income futures markets. Our analysis provides evidence of a significant hedging pressure risk premium in commodity, equity and currency futures markets. The premium correlates with general market movements and with the well-known momentum and carry factors and increases in economic conditions, consistent with the concurrence of greater hedging demand and a lessening of speculator capital flows. In contrast with the currency and fixed income factors, we find that the commodity and equity hedging pressure factors have crosssectional pricing ability across asset classes, beyond traditional risk factors. JEL classifications: G13, G14
This paper investigates the role of intraday prices and volume to generate daily volatility forecasts used for individual stock trading. The analysis is based on a 7-year sample of transaction prices for 14 NYSE stocks. Volatility... more
This paper investigates the role of intraday prices and volume to generate daily volatility forecasts used for individual stock trading. The analysis is based on a 7-year sample of transaction prices for 14 NYSE stocks. Volatility forecasts are obtained from daily returns in a GARCH equation which is augmented with several nonparametric intraday volatility measures or with volume. The overall results from various trading strategies suggest that the use of high frequency price data is not pro…table. The baseline GARCH forecasts outperform the intraday price augmented GARCH forecasts. However, the information content in trading activity can enhance pro…ts. The best performing strategies involve buying the stock when its forecasted volatility is extremely high, suggesting a stronger volatility-return relationship in turbulent periods.
Research Interests:
This paper differentiates itself from the existing literature by testing for the presence of intra and inter-bank heterogeneities in the UK interest rate transmission mechanism. Using a large disaggregated sample of monthly deposit and... more
This paper differentiates itself from the existing literature by testing for the presence of intra and inter-bank heterogeneities in the UK interest rate transmission mechanism. Using a large disaggregated sample of monthly deposit and loan rates 1993-2004 for seven key products, an error correction model is adopted to measure long run pass-through, mark up and the short run speed of adjustment. Overall, the prediction that the official and retail rates move together in the long run is supported. However, financial institutions were found to adjust their rates in significantly different ways following changes in the official rate, which could hinder the achievement of policy objectives. Consumer responses to Bank of England official rate changes could therefore be phased and intricate. Heterogeneity in adjustment is found to be linked to menu costs and key financial ratios (e.g. ROE) under managerial control.
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This study investigates the practical importance of several VaR modeling and forecasting issues in the context of intraday stock returns. Value-at-Risk (VaR) predictions obtained from daily GARCH models extended with additional... more
This study investigates the practical importance of several VaR modeling and forecasting issues in the context of intraday stock returns. Value-at-Risk (VaR) predictions obtained from daily GARCH models extended with additional information such as the realized volatility and squared overnight returns, are confronted with those from ARFIMA realized volatility models. The out-of-sample evaluation is based on a novel difference-in-proportions test that exploits the frequency of individual VaR rejections and a block-bootstrap unconditional coverage test that is robust to estimation uncertainty and model risk. We find that the overnight surprise does not improve the out-of-sample forecastability of the next-day VaR but there is evidence that intraday jumps have forecasting potential. ARFIMA models produce better backtesting results than GARCH models but the latter fare better in terms of independence of the hits sequence. Encompassing tests further suggest that GARCH and ARFIMA models ca...
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This paper examines the predictive content of active attention to hazards or “hazard fear” which is proxied by changes in the volume of internet search queries (or active attention) by 149 weather, disease, geopolitical or economic terms.... more
This paper examines the predictive content of active attention to hazards or “hazard fear” which is proxied by changes in the volume of internet search queries (or active attention) by 149 weather, disease, geopolitical or economic terms. A long-short portfolio strategy that sorts the cross-section of commodity futures by a hazard fear signal -inferred from the co-movement of past excess returns with the active attention -is able to capture an economically and statistically significant premium. A timeseries analysis suggests that this hazard fear premium partially reflects compensation for known risks such as those formalized as hedging pressure, momentum, illiquidity and skewness factors, but is not subsumed by them. Exposure to hazard-fear is strongly priced in the cross-section of individual commodity futures and commodity portfolios over and above known risk factors. The hazard fear premium is significantly greater in periods of higher financial investor pessimism which reveals ...
The forward premium puzzle needs to be reformulated since extant studies address the negative slopes associated with the long dollar swings of the 1980s. By contrast the insignificant coefficients from recent data spans can be explained... more
The forward premium puzzle needs to be reformulated since extant studies address the negative slopes associated with the long dollar swings of the 1980s. By contrast the insignificant coefficients from recent data spans can be explained by an unbalanced regression problem caused by asymmetries in spot returns. These stem from market frictions such as transaction costs and are associated with overshooting of spot rates. Monte Carlo experiments show that asymmetries and overshooting effects produce widely dispersed and statistically insignificant slope coefficients whose small sample mean is close to zero.
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Recent research in commodity futures pricing has established that long-short strategies based on individual signals (such as the slope of the term structure of commodity futures prices, past performance, or hedging pressure...) offer a... more
Recent research in commodity futures pricing has established that long-short strategies based on individual signals (such as the slope of the term structure of commodity futures prices, past performance, or hedging pressure...) offer a better performance than long-only portfolios. However, instead of devoting efforts to comparing the existing K individual signals with a view to helping investors to choose ex-ante one signal, our research aims at unifying the literature by combining the strengths of all K signals. This paper proposes long-short combined strategies that combine the individual signals. Our results suggest that the combined signals generate more accurate buy/sell recommendations than either one of the K individual signals taken in isolation. The combined signals portfolios are also found to better explain the cross-sectional variations in commodity futures returns better than any of the alternatives previously proposed. All in all, we conclude that the combination strat...
Financial crises can hit hard the weakest members of society which calls for a proper understanding of the channels of distress transmission. This paper presents the first micro-level evidence of negative externalities from idiosyncratic... more
Financial crises can hit hard the weakest members of society which calls for a proper understanding of the channels of distress transmission. This paper presents the first micro-level evidence of negative externalities from idiosyncratic bank credit risk events to the equity value of banks, insurance companies, real estate firms and other financial institutions. Observing 556 firms headquartered in 25 European countries, the analysis reveals that the events significantly reduce peers’ equity value. The cross-transmission is not stronger from bank to bank, nor between bank and peer firms with headquarters in the same country which points towards the wake-up call channel as the key driver of the externalities. The instantaneous crosstransmission is similar across different regimes but the 5-day post event transmission is greater in turmoil market conditions. Events that originate in banks officially classified as global systemically important induce a milder wake-up call effect which ...
This paper assesses the relative merits of panel time series models in forecasting sovereign default. It explores the contentious issue of whether controlling for time-series and country heterogeneity is important in forecasting emerging... more
This paper assesses the relative merits of panel time series models in forecasting sovereign default. It explores the contentious issue of whether controlling for time-series and country heterogeneity is important in forecasting emerging market default. For this purpose, it uses conventional inference methods alongside forecasting performance statistics based on both statistical- and economic-loss functions. Since sovereign debt states are rather persistent, it is important to compare the panel model forecasts with naive competitors. For the latter we use a random walk forecast, a naive probability forecast and Pesaran-Timmermann test statistics. Diebold-Mariano tests are also deployed to assess the significance of the forecast accuracy differential across models. Our results corroborate that the choice of the best estimator depends on whether one uses economic or statistical loss functions. Interestingly, models that accommodate cross-section heterogeneity to a large extent are not...
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This article studies the relation between skewness and subsequent returns in commodity futures markets. Systematically buying commodities with low skewness and shorting commodities with high skewness generates a significant excess return... more
This article studies the relation between skewness and subsequent returns in commodity futures markets. Systematically buying commodities with low skewness and shorting commodities with high skewness generates a significant excess return of 8% a year, which is not merely a compensation for the risks associated with backwardation and contango. Skewness is also found to explain the cross-section of commodity futures returns beyond exposures to the backwardation and contango risk factors previously identified. These results are robust to various alternative specifications and extend the documented importance of skewness in the equity market to the commodity futures markets.
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Energy market pundits blamed United States Oil fund (USO), the largest WTI crude oil exchange traded fund, for the negative pricing of the May 2020 contract (known as CLK20) observed on April 20, 2020. Using Granger-causality tests, this... more
Energy market pundits blamed United States Oil fund (USO), the largest WTI crude oil exchange traded fund, for the negative pricing of the May 2020 contract (known as CLK20) observed on April 20, 2020. Using Granger-causality tests, this article shows that USO influenced neither the price of CLK20, nor the price of any other WTI contracts it ever traded. We argue that a disastrous blend of macroeconomic and geopolitical conditions, such as a rising supply triggered by geopolitical tensions concurrent with a demand shattered by Covid-19 lockdowns, provoked a super-contangoed WTI futures market. The steep upward-sloping term structure of WTI futures prices, in turn, led to a spree of cash-and-carry arbitrages that depleted the spare storage capacity at Cushing. The realization of this capacity blowout induced a panic selling amongst long CLK20 investors that eventually lead to the negative pricing.
The paper provides a comprehensive appraisal of style-integration methods in equity index, fixed income, currency, and commodity futures markets. We confront the naive equal-weight integration (EWI) method with a host of ‘sophisticated’... more
The paper provides a comprehensive appraisal of style-integration methods in equity index, fixed income, currency, and commodity futures markets. We confront the naive equal-weight integration (EWI) method with a host of ‘sophisticated’ style-integrations that derive the style exposures using past data according to utility maximization, style rotation, volatility timing, cross-sectional pricing, style momentum or principal components criteria. The analysis, conducted separately per futures market and cross-markets, reveals that the EWI portfolio is unrivalled in terms of risk-adjusted performance while it sustains a relatively low turnover. The findings are robust to analyses that entertain variants of the sophisticated integrations, longer estimation windows, several asset scoring schemes, data snooping tests, sub-periods evaluation and equities in place of futures.
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The paper investigates the information content of speculative pressure across futures classes. Long-short portfolios of futures contracts sorted by speculative pressure capture a significant premium in commodity, currency and equity... more
The paper investigates the information content of speculative pressure across futures classes. Long-short portfolios of futures contracts sorted by speculative pressure capture a significant premium in commodity, currency and equity markets but not in fixed income markets. Exposure to commodity, currency and equity index futures’ speculative pressure is priced in the broad cross-section after controlling for momentum, carry, global liquidity and volatility risks. The findings are confirmed by robustness tests using alternative speculative pressure signals, portfolio construction techniques and sub-periods inter alia. We argue that there is an efficient hedgers-speculators risk transfer in commodity, currency and equity index futures markets. <br><br>
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The portfolio-rebalancing theory of Hau and Rey (2006) yields uncovered equity parity (UEP) as a prediction that local-currency equity return appreciation is offset by currency depreciation. Contrary to UEP, estimations of vector... more
The portfolio-rebalancing theory of Hau and Rey (2006) yields uncovered equity parity (UEP) as a prediction that local-currency equity return appreciation is offset by currency depreciation. Contrary to UEP, estimations of vector autoregressive models for eight Asian emerging markets using daily data reveals a positive nexus between equity returns and currency returns. The extent of the uncovered equity “disparity” is time-varying and asymmetric as it exacerbates in crisis. We find evidence that the UEP failure is due to investors’ return chasing. Robustness checks suggest that this explanation is not an artifact of changing global volatility conditions or a flight-to-quality phenomenon. [Word count: 100]