Forecasting Expected Returns in the Financial Markets

Forecasting Expected Returns in the Financial Markets......Page 4
Copyright Page......Page 5
Table of Contents......Page 6
List of contributors......Page 10
Introduction......Page 12
1.1 Introduction......Page 14
1.2 A modern view of market efficiency and predictability......Page 15
1.3 Weak-form predictability......Page 16
1.4 Semi-strong form predictability......Page 18
1.5 Methodological issues......Page 21
1.6 Perspective......Page 23
References......Page 25
2.1 Introduction......Page 30
2.2 Expected returns......Page 31
2.3 The Black–Litterman model......Page 34
2.4 A new method for incorporating user-specified confidence levels......Page 45
2.5 Conclusion......Page 49
References......Page 50
3.1 Introduction......Page 52
3.2 Workings of the model......Page 53
3.3 Examples......Page 55
3.4 Alternative formulations......Page 59
Appendix......Page 63
References......Page 66
4.1 Introduction......Page 68
4.2 Efficient portfolios......Page 71
4.3 Optimal portfolios......Page 83
4.4 A variety of sorts......Page 90
4.5 Empirical tests......Page 95
4.6 Conclusion......Page 108
Appendix A......Page 109
Appendix B......Page 110
References......Page 112
5.1 Introduction......Page 114
5.2 Linear factor models......Page 117
5.3 Approximating risk with a mixture of normals......Page 119
5.4 Practical problems in the model-building process......Page 121
5.5 Optimization with non-normal return expectations......Page 125
References......Page 128
6.1 Introduction......Page 130
6.2 Derivation of the prior and posterior densities......Page 132
6.3 Numerical evaluation......Page 144
6.4 Results......Page 147
6.5 Concluding remarks and issues for further research......Page 153
Appendix......Page 155
References......Page 161
7.1 Introduction......Page 164
7.2 A classical framework for option pricing......Page 168
7.3 A Bayesian framework for option pricing......Page 169
7.4 Empirical implementation......Page 176
7.5 Conclusion......Page 185
Appendix......Page 186
References......Page 187
8.1 Introduction......Page 190
8.2 Notions of robustness......Page 191
8.3 Case study: an implementation of robustness via forecast errors and quadratic constraints......Page 195
8.4 Extensions to the theory......Page 197
8.5 Conclusion......Page 200
References......Page 201
9.1 Introduction......Page 204
9.2 Hypotheses and calculating factors......Page 206
9.3 Empirical results......Page 209
9.4 Conclusions......Page 224
References......Page 225
10.1 The information coefficient and information decay......Page 228
10.2 Returns and information decay in the single model case......Page 230
10.3 Model combination......Page 234
10.4 Information decay in models......Page 235
10.5 Models – optimal horizon, aggression and model combination......Page 237
Reference......Page 239
11.1 Introduction......Page 240
11.2 Analysis of the single model problem......Page 241
11.3 Closed-form solutions......Page 245
11.4 Multi-model horizon framework......Page 249
11.5 An alternative formulation of the multi-model problem......Page 254
11.6 Conclusions......Page 256
Appendix A......Page 257
Appendix B......Page 259
References......Page 263
12.1 Introduction......Page 264
12.2 Actual versus risk-neutral probabilities......Page 265
12.3 Replicating investments with bets......Page 268
12.4 Log optimal (Kelly) betting......Page 269
12.5 Replicating Kelly bets with puts and calls......Page 271
12.6 Options on Kelly bets......Page 272
12.7 Conclusion......Page 273
References......Page 274
13.1 Introduction......Page 278
13.2 General set-up......Page 279
13.3 Power utility......Page 284
13.4 Exponential utility, loss aversion and mixed equilibria......Page 289
13.5 Conclusions......Page 290
References......Page 291
Index......Page 294