Homepage of Pedro Barroso

I am a Senior Lecturer of Finance at the School of Banking and Finance at UNSW in Sydney, Australia. My PhD is in Finance from Nova School of Business and Economics (Lisbon, Portugal). My main research interests are in empirical asset pricing, anomalies, risk management, the foreign exchange market and portfolio management.  

School of Banking and Finance 
UNSW Australia UNSW Business School  School of Banking and Finance 
Level 3, Central Wing, Business School building, Gate 2 High Street UNSW Sydney 2052
Telephone +61 (2) 9385 5854 | Fax +61 (2) 9385 6347 | e-mail: p.barroso@unsw.edu.au

Google scholar profile here.
Curriculum: CV.

Momentum Has its Moments, with Pedro Santa-Clara.  Journal of Financial Economics, volume 116, Issue 1, April 2015, Pages 111-120.
 Click here for a folder with the data and programs used to produce the tables in the paper. 
Beyond the Carry Trade: Optimal Currency Portfolios, with Pedro Santa-Clara. Journal of Financial and Quantitative Analysis, volume 50, Issue 5, October 2015, pages 1037-1056. Click here for the internet appendix.  

Working papers:

Lest we forget: Using Out-Of-Sample Errors in Portfolio Optimization,  Revise & Resubmit at the Review of Financial Studies

AbstractPortfolio optimization usually struggles in realistic out of sample contexts. I de-construct this stylized fact comparing historical estimates of the inputs of portfolio optimization with their subsequent out of sample counterparts. I confirm that historical estimates are often very imprecise guides of subsequent values but also find this lack of persistence varies significantly across inputs and sets of assets. Strikingly, the resulting estimation errors are not entirely random. They have predictable patterns and can be partially reduced using their own previous history. A plain Markowitz optimization using corrected inputs performs quite well, out of sample, namely outperforming the 1/N rule. Also the corrected covariance matrix captures the risk of optimal portfolios much better than the historical one.
Conferences / seminars: Catolica Business School (Lisbon), Deakin University, Schroder's official institutions seminar (Sydney), Portuguese Finance Network (2016), FMA Europe (2016), EFMA (2016), FMA Asia (2016). 

Abstract: We study the risk dynamics of the betting-against-beta anomaly. The strategy shows strong and predictable time variation in risk and no risk-return trade-off. A risk-managed strategy exploiting this achieves an annualized Sharpe ratio of 1.28 with a very high information ratio of 0.94 with respect to the original strategy. Similar strategies for the market, size, value, profitability, and investment factors achieve a much smaller information ratios of 0.15 on average. The large economic benefits of risk-scaling are similar to those of momentum and set these two anomalies apart from other equity factors. Decomposing risk into a market and a specific component we find the specific component drives our results. The performance of the strategy is also observed in international markets and is robust to transaction costs. 
Conferences / SeminarsEFMA 2017 (winner of the WRDS best paper award), Spanish Finance Association (2017), Australasian Banking and Finance Conference 2017, IESE, ESADE, Paris-Dauphine, QUT, Frontiers of Factor Investing Conference at University of Lancaster (2018).
AbstractWe examine the risk-return trade-off among equity factors. We obtain a positive in-sample risk-return trade-off for the profitability (RMW) and investment (CMA) factors of Fama and French (2015, 2016), while for the market and momentum factors there is a negative relation. The out-of-sample forecasting power (of factor volatility for factor returns) is economically significant for both RMW and CMA: By constructing a trading strategy that relies on such predictability, we obtain annual Sharpe ratios above one and utility gains above 5% per year. We also find weak evidence that the factor variances are negatively correlated with the aggregate equity premium.
Conferences / Seminars: UNSW, Midwest Finance Association 2018, FMA Europe 2018.

AbstractRisk premiums for exposure to state variables that predict consumption growth are time-varying consistent with macro-finance theory. We first show that the relation between state variables, such as the term spread, and future consumption growth varies significantly over time. Consistent with an Intertemporal CAPM, we find that state variable risk premiums (in the cross-section of individual stocks) vary over time accordingly: Risk premiums increase by 5% (annualized) when a state variable predicts consumption growth strongly relative to its own history. We further show that this effect is magnified by time-variation in the variance of the state variables, which we argue to be driven by general macroeconomic uncertainty. Our conditional evidence contributes to recent literature that focuses on the unconditional pricing of state variable risk and finds mixed results.
Conferences / Seminars: UNSW, Australasian Banking and Finance Conference 2017, Paris Eurofidai 2017, ESSEC. 

Institutional Crowding and the Moments of Momentumwith Paul Karehnke and Roger M. Edelen

Abstract: Several studies outline a destabilizing effect on asset prices from arbitrageur crowding. We consider this as an explanation for momentum crashes. We first develop theoretical predictions under a variety of belief mechanisms, and then test those predictions using 13F institutional holdings data. Our theory predicts unbounded momentum crashes when arbitrageurs maintain naïve linear beliefs, but no abnormal tail risk when beliefs are a fixed point of market clearing. Consistent with the equilibrium predicted under rational beliefs, our empirical tests on the first four moments of momentum returns find no evidence that momentum crashes relate to institutional crowding.
Conferences / SeminarsUniversity of Arizona, New South Wales, California Riverside, Technology at Sydney, Newcastle, Virginia Tech. Tennessee’s Smokey Mountain Finance Conference, The 14th Annual IDC/Herzliya Conference and Annual Quantitative Trading Symposium, and Manchester’s Hedge Fund Conference, Australasian Banking and Finance Conference (2017).

Abstract: Campbell, Serfaty-De Medeiros, and Viceira (2010) propose an optimized method to hedge currency risk in portfolios of international equities. In a demanding out-of-sample test, incorporating transaction and rebalancing costs, and margin requirements we find their method reduces risk in real time, but also underperforms economically a naïve alternative or even a purely domestic portfolio. We propose modeling the currency hedging strategy as a function of characteristics proxying for expected returns and risk. We find that using currency momentum, value, carry, and autocorrelation significantly reduces the cost of hedging. Proxies for risk, such as volatility, skewness, beta on volatility, and equity sensitivity are irrelevant in our optimizations. Our optimal strategy is close to a fully hedged portfolio, but with a sizable 38% gain in Sharpe ratio.
Conferences / Seminars10th IAFDS (winner of the "paper with largest potential to publish" award), 2017 Australasian Banking and Finance Conference, 2017 Auckland Finance Meeting.

Abstract: Rational asset pricing models do not explain the alphas and utility gains produced by volatility managing stock portfolios found by prior studies. Hence, we hypothesize that limits to arbitrage (LTA) explain this abnormal performance. Contrary to the hypothesis, we document that volatility managing long-equity portfolios only improves performance among stocks with low and medium LTA proxied by institutional ownership (IO) and idiosyncratic volatility (IV). Moreover, the utility gains of volatility managing mean-variance-efficient portfolios of these factors out-of-sample are consistently twice to many times as high for factors constructed from low-LTA stocks than high-LTA stocks. The concentration of the economic gains from volatility management in market segments with the lowest LTA contrasts sharply with the common finding that anomaly returns are lowest in these segments.

Abstract:A direct measure of the cyclicality of momentum at a given point in time, its bottom-up beta with respect to the market, forecasts both the returns and the risk of the strategy. Challenging a potential risk-based explanation, a highly cyclical momentum portfolio forecasts both higher risk and lower returns for the strategy. The results show robustness out-of-sample (OOS) and controlling for other variables. One predictive regression of monthly momentum returns on its bottom-up beta produces an OOS R-square of 2.41%. This contrasts with the usual negative OOS R-squares of similar predictive regressions for the market excess return.
Conferences / seminars: University of Hull, Australasian Banking and Finance Conference (2017).


February 16, 2016 - My research on momentum featured in BusinessThink, UNSW's Business newsletter. 
July 1, 2016 - Opinion article on Brexit in Jornal de Negocios (the leading Economics / Business newspaper in Portugal): http://www.jornaldenegocios.pt/opiniao/detalhe/brexit_quanto_custa.html 
July 1, 2017 - My joint paper with Paulo Maio Managing the Risk of the 'Betting-Against-Beta' Anomaly: Does It Pay to Bet Against Beta? won the WRDS Best Conference paper award in EFMA 2017.
January 17, 2018 - My post on CFA's blog on managing the risk of momentum and other factors: https://blogs.cfainstitute.org/investor/2018/01/17/timing-the-market-momentum-and-beyond/ 
Subpages (1): Curriculum Vitae