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Macrofinance

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Anusar Farooqui
added a research item
We look at portfolios of blue-chip US equities that are exposed to the overnight drift and minimize risk, as defined by the Fed's risk model for US securities. We document that there is a healthy premium in the cross-section, both pre and post-tax and in raw and risk-adjusted terms. In particular, we show that our portfolio is less risky than the market portfolio. We propose to make this portfolio available to small investors. We may at any time introduce other portfolios to diversify the menu of options. Our goal is to become a publicly-traded asset manager that brings quant hedge fund-like strategies to the small investor. This is not an offer to sell or buy securities. It is to consummate the French revolution in finance and democratize the hedge fund business.
Anusar Farooqui
added a research item
The term structure of VIX futures contains a very strong signal of dealer risk appetite. Unlike balance sheet quantities, this feature is available at very high frequencies. Here we exhibit two systematic strategies to mine the attendant risk premium from the term structure of expected volatility. We optimize our two hyperparameters by OOS cross-validation. We compare our strategies to holding the S&P 500, selling short-term vol unhedged, and a portfolio that sells short-term vol and hedges by going long on medium-term vol. We find that our strategies allow us to harvest a considerable portion of the risk premium associated with the balance sheet management of market-based intermediaries. Both in-sample and OOS, the risk-adjusted returns on our strategies are at least twice as high as the three benchmarks.
Anusar Farooqui
added a research item
We interrogate 140 years of macrofinancial data from three directions. The first approach pays attention to the slow buildup of financial imbalances that threaten financial stability and isolates medium-term movements in credit and property prices to identify national financial cycles. We show that the data reveals the reemergence of outsized financial cycles since the 1980s. In particular, we document the existence of an outsized financial cycle in the United States during the interwar period. Further, we show that virtually all financial booms are accompanied by housing-finance booms. The second approach pays attention to the predictive information in the consumption to wealth ratio. We show that the consumption to wealth ratio predicts not only global real rates (as has already been shown) but also property excess returns and the term spread although not stock excess returns. The third approach pays attention to the risk appetite of financial market intermediaries whose marginal value of wealth prices a broad class of financial assets. We create a metric for intermediary risk appetite for an earlier period not covered by the extant literature (1920-1970) and show that intermediary risk appetite predicts stock excess returns. We conclude with a discussion of our findings and the path forward for marcrofinance.
Anusar Farooqui
added a research item
We show that fluctuations in the risk-bearing capacity of US securities broker-dealers are priced in the cross-section of expected stock excess returns. We show that the intermediary risk premium dwarfs the premiums on benchmark factors both unconditionally and dynamically. A portfolio that tracks our intermediary factor sports a dramatically higher Sharpe ratio than benchmark portfolios. We find that the risk premium on balance sheet capacity contains significant macroeconomic information. Specifically, we document that the intermediary risk premium is a significant predictor of US real output growth and that the cyclical component of the intermediary risk premium predicts US recessions.
Anusar Farooqui
added a research item
We examine the pricing performance of various measures of dealer risk appetite. We construct a novel measure of risk appetite that captures the provision of leverage to the clients of broker-dealer firms. We also construct a factor mimicking portfolio that tracks shocks to the leverage of broker-dealers. We show that intermediary pricing models convincingly outperform benchmark models for a class of test assets which the benchmark factors were specifically designed to price.