Aug 2026· Annual Review of Financial Economics· 0 citations
Abstract
Characteristic-based factors embed large unpriced common components that depress Sharpe ratios and lead to deviations from the mean-variance efficient (MVE) frontier. We discuss how to decompose tradable factor returns into priced (MVE) and unpriced components, showing that hedging unpriced variation realigns factors with efficiency. We outline theoretical conditions for characteristic portfolios to span the MVE portfolio and describe practical hedge portfolio construction. In some asset classes—currencies and sovereign bonds—real-time estimation of the MVE portfolio is feasible. In the case of equities, one can hedge unpriced risks from characteristic-based factors. Empirically, unpriced risks account for 30–99% of factor return variance, and hedging can more than double Sharpe ratios.
We study whether nuclear and energy-adjacent equity options exhibit a harvestable variance risk premium. Using CRSP and OptionMetrics data for 2000-2024, we construct a systematic cash-secured short-put strategy on a curated universe of nuclear-related firms. The strategy compares at-the-money put implied volatility wi...
Abstract The complexity of asset return variability justifies supplementing the standard Capital Asset Pricing Model (CAPM) formula with market risk measures based on firms’ fundamental analysis. Moreover, a key area of investigation involves the approach to downside pricing. The main objective of this study is to test...
Lesław Markowski, Przemysław Garsztka, Jacek Mizerka et al.· Economics and Business Revie...· 0 citations
A simple production economy with nominal price rigidities explains several key asset pricing facts, including the average slopes and cyclicality of equity and interest rate term structures. Nominal rigidities amplify the procyclicality of dividends after negative productivity shocks and generate countercyclical inflati...
Pierlauro Lopez, Francisco Vazquez-Grande, D. Lopez-Salido· Journal of Financial Economi...· 0 citations
Traditional risk parity approaches rely largely on volatility measures, which may not fully capture asymmetric risk profiles. This study examines a dynamic allocation approach that minimizes portfolio-level Conditional Value-at-Risk (CVaR). The CVaR-Minimizing Dynamic Allocation (CVaR-DA) approach is intended to manage...
Veraphong Chutipat, Peerapat Wattanasin, Tanpat Kraiwanit· Journal of Risk and Financia...· 0 citations
