Forecasting Expected Returns in the Financial Markets

Stephen Satchell075068321X, 978-0-7506-8321-0

Market efficiency and forecasting — A step-by-step guide to the Black-Litterman model — A demystification of the Black-Litterman model: managing quantitative and traditional portfolio construction — Optimal portfolios from ordering information — Some choices in forecast construction — Bayesian analysis of the Black-Scholes option price — Bayesian forecasting of options prices: a natural framework for pooling historical and implied volatility information — Robust optimization for utilizing forecasted returns in institutional investment — Cross-sectional stock returns in the UK market: the role of liquidity risk — The information horizon- optimal holding period, strategy aggression and model combination in a multi-horizon framework — Optimal forecasting horizon for skilled investors — Investments as bets in the binomial asset pricing model — The hidden binomial economy and the role of forecasts in determining prices

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Table of contents :
Table of Contents……Page 3
1.1 Introduction……Page 10
1.2 A modern view of market efficiency and predictability……Page 11
1.3 Weak-form predictability……Page 12
1.4 Semi-strong form predictability……Page 14
1.5 Methodological issues……Page 17
1.6 Perspective……Page 19
References……Page 21
2.1 Introduction……Page 25
2.2 Expected returns……Page 26
2.3 The Black–Litterman model……Page 29
2.4 A new method for incorporating user-specified confidence levels……Page 40
2.5 Conclusion……Page 44
References……Page 45
3.1 Introduction……Page 47
3.2 Workings of the model……Page 48
3.3 Examples……Page 50
3.4 Alternative formulations……Page 54
Appendix……Page 58
References……Page 61
4.1 Introduction……Page 62
4.2 Efficient portfolios……Page 65
4.3 Optimal portfolios……Page 77
4.4 A variety of sorts……Page 84
4.5 Empirical tests……Page 89
4.6 Conclusion……Page 102
Appendix A……Page 103
Appendix B……Page 104
References……Page 106
5.1 Introduction……Page 108
5.2 Linear factor models……Page 111
5.3 Approximating risk with a mixture of normals……Page 113
5.4 Practical problems in the model-building process……Page 115
5.5 Optimization with non-normal return expectations……Page 119
References……Page 122
6.1 Introduction……Page 124
6.2 Derivation of the prior and posterior densities……Page 126
6.3 Numerical evaluation……Page 138
6.4 Results……Page 141
6.5 Concluding remarks and issues for further research……Page 147
Appendix……Page 149
References……Page 155
7.1 Introduction……Page 158
7.2 A classical framework for option pricing……Page 162
7.3 A Bayesian framework for option pricing……Page 163
7.4 Empirical implementation……Page 170
7.5 Conclusion……Page 179
Appendix……Page 180
References……Page 181
8.1 Introduction……Page 183
8.2 Notions of robustness……Page 184
8.3 Case study: an implementation of robustness via forecast errors and quadratic constraints……Page 188
8.4 Extensions to the theory……Page 190
8.5 Conclusion……Page 193
References……Page 194
9.1 Introduction……Page 196
9.2 Hypotheses and calculating factors……Page 198
9.3 Empirical results……Page 201
9.4 Conclusions……Page 216
References……Page 217
10.1 The information coefficient and information decay……Page 219
10.2 Returns and information decay in the single model case……Page 221
10.3 Model combination……Page 225
10.4 Information decay in models……Page 226
10.5 Models – optimal horizon, aggression and model combination……Page 228
Reference……Page 230
11.1 Introduction……Page 231
11.2 Analysis of the single model problem……Page 232
11.3 Closed-form solutions……Page 236
11.4 Multi-model horizon framework……Page 240
11.5 An alternative formulation of the multi-model problem……Page 245
11.6 Conclusions……Page 247
Appendix A……Page 248
Appendix B……Page 250
References……Page 254
12.1 Introduction……Page 255
12.2 Actual versus risk-neutral probabilities……Page 256
12.3 Replicating investments with bets……Page 259
12.4 Log optimal (Kelly) betting……Page 260
12.5 Replicating Kelly bets with puts and calls……Page 262
12.6 Options on Kelly bets……Page 263
12.7 Conclusion……Page 264
References……Page 265
13.1 Introduction……Page 268
13.2 General set-up……Page 269
13.3 Power utility……Page 274
13.4 Exponential utility, loss aversion and mixed equilibria……Page 279
13.5 Conclusions……Page 280
References……Page 281
Index……Page 283