Research

Working papers:

This paper investigates the impact of trading on the commodity futures risk premium. We focus on intra-commodity spreading positions and study its asset pricing implications on the cross-section of commodity futures returns. We provide evidence that spreaders arise as counterparties to index traders and spreading positions scaled by open interest (SP) negatively predict commodity futures excess returns associated with index pressure. A battery of empirical tests shows that SP help separate commodities that trade based on economic fundamentals from commodities that are subject to market frictions introduced via commodity index investments. We propose an SP factor, a long-short portfolio based on SP that is priced in the commodity futures market, even after controlling for well-known factors, and is robust to accounting for omitted variable biases and measurement errors.

Risk-Corrected Probabilities of a Binary Event, with Alex Ferreira and Arie Gozluklu

We obtain risk-neutral probabilities of the Brexit referendum using data from both the options and prediction markets. We then provide a risk-corrected measure of these probabilities using both non-parametric and parametric methods. While former correction marginally changes the risk-neutral probability, the effect of the latter depends on relative wealth calibration and risk preferences. We estimate subjective Brexit probabilities from past opinion polls and provide daily estimates of voting intention to leave from the BES survey. By comparing the subjective probabilities with our risk-corrected measures, our results show that both FX option and prediction market participants are likely to reveal moderate risk seeking preferences before the Brexit referendum.

Publication:

Exchange Rates and Binary Political Events, with Pedro Venturi, Alex Ferreira and Arie Gozluklu, forthcoming at Oxford Economic Papers

This paper introduces a rational expectations model that explains exchange rate dynamics and predictable forecast errors using private (aggregated via order flow) and public (probabilities of a binary event) information. We test the model for the periods leading up to the presidential impeachment vote in Brazil, the Brexit Referendum, and Donald Trump's election in 2016. Proxies of the physical probabilities of these events reveal that they are a crucial source of pricing information for the BRL, GBP, and MXN currency pairs with the USD. They also explain forecast errors. The information content of order flow changes before and after an actual regime change resolves uncertainty.

Less Disagreement, Better Forecasts: Adjusted Risk Measures in the Energy Futures Market, with Xiaohan Xue and Ning Zhang, Journal of Futures Market, 2023, Volume43, Issue10

This paper develops a generic adjustment framework to improve on the market risk forecasts of diverse risk forecasting models, which indicates the degree to which risk is under- and overestimated. In the context of the energy commodity market, a market in which tail risk management is of crucial importance, the empirical analysis shows that after this adjustment framework is applied, the forecasting performance of various risk models generally improves, as verified by a battery of backtesting methods. Additionally, our method also lessens the risk model disagreement among post-adjusted risk forecasts.