How some bankers made a million by trading just two securities?

in Journal of Empirical Finance (in press)

We study a pair trading strategy that utilizes short-term return reversals in the stock market. Using U.S. data, we show that returns to our pair trading strategy exceed reasonable estimates for ... [more ▼]

We study a pair trading strategy that utilizes short-term return reversals in the stock market. Using U.S. data, we show that returns to our pair trading strategy exceed reasonable estimates for transaction costs. The strategy also generates positive alpha when controlling for the standard risk factors. Second, using transaction level data from Finland, focusing on a popular pair, we provide evidence that these kinds of pair trading returns are compensation from providing liquidity. On the days when the expected returns to our pair trading strategy are the highest, the trading volume is abnormally high and, judging from active brokers’ net trades, nearly 45% of all brokers (or their customers) engage in pair trading in accordance with our trading strategy. These brokers are mainly counterparties to few brokers that trade large quantities of stocks inconsistent with our strategy. [less ▲]

The Search for Yield: Implications to Alternative Investments

in Journal of Empirical Finance (2017), 44(-), 227-236

The evolving beta-liquidity relationship of hedge funds

in Journal of Empirical Finance (2017), 44

Hedge funds are known to have liquidity-timing capability, but this might be conditional on aggregate market conditions. To test this, we analyze changes in the relation between hedge funds' stock market ... [more ▼]

Hedge funds are known to have liquidity-timing capability, but this might be conditional on aggregate market conditions. To test this, we analyze changes in the relation between hedge funds' stock market exposure and aggregate stock market liquidity. Employing an optimal changepoint approach, we find that equity-oriented hedge funds display a significant shift in liquidity-timing behavior after the major market microstructure changes in the year 2000. The shift is from a negative relation between market beta and liquidity towards a positive relation. We rule out a mechanistic explanation of the results by computing the returns to several familiar risk arbitrage strategies, finding in them no evidence of a similar shift in liquidity timing. [less ▲]

Is there a Bubble in the Art Market?

in Journal of Empirical Finance (2016), 35(-), 99-109

Euro Crash Risk

in Journal of Empirical Finance (2016), 38(-), 417-428

Market Sentiment in Commodity Futures Returns

in Journal of Empirical Finance (2015)

A Framework for Tracking Changes in the Intensity of Investment Funds’ Systemic Risk

in Journal of Empirical Finance (2014), 29

This study applies to investment funds a novel framework which combines marginal probabilities of distress estimated from a structural credit risk model with the consistent information multivariate ... [more ▼]

This study applies to investment funds a novel framework which combines marginal probabilities of distress estimated from a structural credit risk model with the consistent information multivariate density optimization (CIMDO) methodology of Segoviano, and the generalized dynamic factor model (GDFM). The framework models investment funds’ distress dependence explicitly and captures the time-varying non-linearities and feedback effects typical of financial markets. It measures investment funds systemic credit risk in three forms: (1) credit risk common to all funds within each of the seven categories the Eurosystem reports to the ECB; (2) credit risk in each category of investment fund conditional on distress on another category of investment fund and; (3) the buildup of investment funds’ vulnerabilities over time which may unravel disorderly. In addition, the estimates of the common components of the investment funds’ distress measures contain early warning features, and the identification of their drivers is useful for macroprudential policy. As a result, this framework contributes to making macroprudential policy operational [less ▲]

International Cross-listing and Price Discovery under Trading Concentration in the Domestic Market: Evidence from Japanese Shares

in Journal of Empirical Finance (2014), 25

Modeling Structural Changes in the Volatility Process

in Journal of Empirical Finance (2011)