One challenge for global equity managers is keeping track of correlations (or covariances) between the sources of risk in their portfolios. For instance, in the Barra Global Equity Model (GEM2) there are 153 factors, including country, currency, style, and industry factors that we have identified as being important. This leads to 11,628 unique correlations/covariances of which to keep track bet...

Obtaining more accurate equity value estimates is the starting point for stock selection, value-based indexing in a noisy market, and beating benchmark indices through tactical style rotation. Unfortunately, discounted cash flow, method of comparables, and fundamental analysis typically yield discrepant valuation estimates. Moreover, the valuation estimates typically disagree with market price....

We revisit the question whether commodities should be included in investors' portfolios. We employ for the first time a stochastic dominance efficiency (SDE) approach to construct optimal portfolios with and without commodities and we evaluate their comparative performance. SDE circumvents the necessity to posit a specific utility function to describe investor's preferences and it does not impo...

International equity markets linkages are characterized by nonlinear dependence and asymmetries. We investigate shifts in long run comovements in stock markets by means of an ‘interrupted’ Markov switching cointegration specification. This flexible approach allow us to study to what extent documented changes in global integration are permanent, or whether market linkages are subject to changes....

In the context of a dynamic trading strategy, the ultimate purpose of any forecasting model is to choose actions which result in the optimisation of the trading objective. In this paper we develop a methodology for optimising an objective function, using a parameterised decision rule, for a given forecasting model. We simulate the expected trading performance for different decision parameters a...

This research investigates the portfolio diversification benefits of commodities in the backdrop of uncertainty caused by the financial crisis, increased Financialization and speculation in commodity markets. Portfolios are formed out of varied asset classes comprise of equity, bond, infra structure, commodity spot & futures indices and sectoral indices such as agri, metals and energy sectors o...

This paper focuses on a nonlinear stochastic model for financial simulation and forecasting based on assumptions of multivariate stochastic correlation, with an application to the European market. We present in particular the key elements of a structured hierarchical econometric model that can be used to forecast financial and commodity markets relying on statistical and simulation methods. The...