This research proposes Conditional Currency Hedging based on FX risk factors to reduce total portfolio risk of given stock, bond or commodity portfolios. In our employed sample, a conditional currency hedging framework based on implied FX volatility results in lower variance of a global equity portfolio than achieved by either no, full or unconditional mean-variance hedging, both in- and out-of-sample. Further analysis with bond and commodity performance data will follow.
We find that the CAPM fails to explain the small firm effect even if its non-parametric form is used which allows time-varying risk and non-linearity in the pricing function. Furthermore, the linearity of the CAPM can be rejected, thus the widely used risk and performance measures, the beta and the alpha, are biased and inconsistent. We deduce semi-parametric measures which are non-constant under extreme market conditions in a single factor setting; on the other hand, they are not significantly different from the linear estimates of the Fama-French three-factor model. If we extend the single factor model with the Fama-French factors, the simple linear model is able to explain the US stock returns correctly.
We perform variance ratio tests based on non-parametric methods to detect the size of the randomwalk component of the USartauctionprices. The past 134 years of the USartprices exhibit large transitory component (72%) and based on this, the randomwalk hypothesis does not hold. However, possibly due to sparse data before 1935 or due to institutional changes of the art market after World War II, we detect structural breakpoints and find that the randomwalk hypothesis and the weak-formefficiency of the USart market cannot be rejected at least for the past 64 years.
We analyze the prices of Baedeker guidebooks issued between 1828 and 1945 in the English, French and German languages. We compile a repeat sales regression index of eBay hammer prices, which reveals a common factor in Baedeker guidebook prices. We find mixed evidence on the underperformance of masterpieces (defined as the most expensive guidebooks). No significant difference is found between the average returns of masters and those of non-masters; however, under a five-factor asset-pricing model consisting of Carhart's four factors and the Pástor-Stambaugh liquidity factor, only masterpieces exhibit significant underperformance. The average
price levels of the US, UK and Continental European Baedeker markets do not differ significantly, indicating that the law of one price cannot be rejected. The Baedeker market posts significant negative abnormal returns between 2005 and 2009; however, this result is not found for returns of German-language and non-master guidebooks.
We have investigated the regime-switching role of different price to earnings (P/E)
variants. Two-regime asset pricing models allow us to estimate critical levels above
and beyond markets exhibit different systematic risk and abnormal return. However,
whether the regime switch is from a less risky to a riskier state is highly dependent on the P/E variant and on the specific market it has been employed. In developed markets P/E ratios are sentiment measures and high values do not necessarily indicate overpricing. Both in developed and in emerging markets the use of local P/E can be misleading, as alone, it cannot take into account the global sentiment and the local circumstances at the same time. The relative P/E (RPE); that is, the ratio of local to global P/E appears to be the best tool to detect underpriced/overpriced markets both in the developed and in the emerging world.
This paper applies vector error correction models that show that oil and natural gasprices decoupled around 2009. Before 2009, US and UK gasprices had a long-term equilibrium with crude prices to which gasprices always reverted after exogenous shocks. Both US and UK gasprices adjusted to the crude oilprice individually, and departure from the equilibrium gasprice on one continent resulted in a similar departure on the other. After an exogenous shock, the adjustment between US and UK gasprices took approximately 20 weeks on average, and the convergence was mediated mainly by crude oil with a necessary condition that arbitrage across the Atlantic was possible. After 2009, however, the UK gasprice has remained integrated with oilprice, but the US gasprice decoupled from crude oilprice and the European gasprice, as the Atlantic arbitrage has halted. The oversupply from shale gas production has not been mitigated by North American export, as there has been no liquefying and export capacity.
