Event studies are generally employed by financial economists to specify and test interesting economic hypotheses. Systematically nonzero abnormal security returns that persist after a particular type of corporate event are inconsistent with market efficiency. Common examples include earnings, mergers, and capital issuances.
Market cycles can be analized through the formation of bubbles consisting of four phases: Accumulation, Mark-Up, Distribution, and Mark-Down. Usually, accumulation coincides with the early stages of recovery, mark-up with the consolidation of the economic condition leading to a bullish sentiment, distribution substantially with lateral movements and indecision in market sentiment, and mark-down with the early stages of mid recession.
Currencies move with supply and demand, politics, interest rates, speculation, and GDP. Thus, whenever growth in a country is mainly commanded by commodities exports, some currencies are generally correlated with commodity prices. Major commodity currencies include the Australian Dollar, the New Zealand Dollar, the Canadian Dollar, the Japanese Yen, and the Swiss Franc. Minor currencies include the Russian Ruble, the Colombian Peso, and the Peruvian Sol.
Lagging indicators represent financial signs that becomes apparent only after a large economic shift has taken place. Such indicators are used to confirm the recent strength or weakness of economic activity. The Conference Board Lagging Index generally reacts after the start of recessions and expansions.
These variables track the current state of the economy; thus, coincindent indicators are useful to understand the strength and resilience of current economic conditions. Specifically, such metrics are used in conjunction with leading and lagging indicators to get a full view of where the economy has been and how it is expected to change in the future.
The leading economic index (LEI) for the United States was implemented in 1996 and introduced the interest rate spread as a measure for recessions but also measures used to cover manufacturing orders, commodity, prices, and inflation. The LEI index is thought to change in advance of the general economy; thus, it is used to gauge whether the pace of future business activity is expected to accelerate, decelerate, or trend sideways.
Value at Risk measures the likelihood of losses to an asset or portfolio, over a defined period for a given confidence interval, due to market risk. Such a narrow definition of risk is further limited to the VaR focus on downside risk and potential losses in the short-term; indeed, VaR can be computed over a quarter or a year, but it is usually computed over a day, a week or a few weeks.
Portfolio analysis is essentially a statistical technique. However, because the ‘‘true’’ population parameters for the input data (expected returns, variances, and covariances) are unobservable, sample statistics must be estimated. Thus, the efficient portfolios generated by portfolio analysis are no better than the statistical input data on which they are based.
Estimation of betas with regression is adequate for asset managers, but it is not appropriate in risk management of portfolios because monitoring is done on a frequent basis – daily and even intra-daily. Indeed, parameters estimated by OLS at these frequencies will not reflect the actual market conditions because they just represent an average value over time on the sample.
The two fundamental ingredients of Markowitz (1952) mean-variance optimization are the expected (excess) return for each asset (the portfolio manager’s ability to forecast), and the covariance matrix of asset returns (the risk control).
