Key Points: – Financial crises are characterized by internal vulnerabilities that worsen over time and trigger a crisis. – Classical methods, such as logistic regressions, have been used to predict financial crises. – Machine learning algorithms offer new approaches, such as unsupervised learning and clustering. – While machine learning has its weaknesses, it offers significant benefits for forecasting financial crises. … Read More

Key Points: The US Federal Reserve’s aggressive monetary tightening is impacting the global financial system. US interest rates and a strong dollar are disrupting cross-border capital flows and straining the finances of countries holding large amounts of dollar-denominated debt. US monetary policy has historically shaped cross-border capital flows and debt-servicing sustainability. The Fed’s policies will impact the global financial system, … Read More

Key Points: The use of leverage is crucial in maximizing the internal rate of return (IRR) in private equity transactions. A higher leverage ratio leads to higher returns on equity and cash-on-cash multiples upon exit. The timing of leverage recapitalizations and exits can significantly impact the overall returns. Leverage offers tax advantages, as debt interest repayments are usually tax-deductible. Private … Read More

Traditional finance techniques can be applied to analyze and evaluate digital assets. Organizing crypto assets into sectors can provide diversification and identify investment opportunities. Valuation methodologies, such as the Gordon Growth Model, can be adapted to assess the value of crypto tokens. Risk management techniques, including correlations and risk factor modeling, are important for constructing digital asset portfolios. Digital assets, … Read More

Key Points: The performance of stocks, sectors, and factors during times of war can be surprising and counterintuitive. Historical analysis shows that the US stock market expanded during the US Civil War and World War II, with only a net decline during World War I. The long-short performance of size, value, and momentum factors during World War II was positive, … Read More

The global asset owner community, which includes pension funds, sovereign wealth funds, foundations, and endowments, possesses considerable influence and control over $23.5 trillion in assets. According to a survey conducted by Morningstar, 85% of asset owners believe that environmental, social, and governance (ESG) factors are important to investment policy. Asset owners are pushing for improvements in ESG ratings, indexes, data, … Read More

2022 has been a challenging year for asset classes across the board, including bonds and fixed-income investments. While these assets are typically seen as a diversification and cushion during rough times in the equity market, they have not performed as expected. To understand when fixed-income assets have provided the desired benefits, we analyzed the correlations between bond and equity returns. … Read More

Key Points: Profitability metrics may not provide downside protection during bear markets. Incorporating conservatism as an additional quality dimension can reduce downside risk. Profitability strategies failed to provide downside protection in historical analysis. Combining profitability with conservatism resulted in better risk-adjusted returns. Conservatism includes factors such as low leverage and strong balance sheets. Introduction When searching for high-quality stocks, profitability … Read More

The following is excerpted from Goals-Based Portfolio Theory by Franklin J. Parker, CFA, published this year by Wiley. “I’ve heard people compare knowledge of a topic to a tree. If you don’t fully get it, it’s like a tree in your head with no trunk — when you learn something new about the topic there’s nothing for it to hang … Read More

Key Points: The correlation between cryptocurrencies and traditional asset classes has been changing. Interest in digital assets remains high, with a significant portion of Americans having invested in or used cryptocurrencies. Bitcoin, once seen as a hedge against equity markets, now shows a growing correlation with the S&P 500. To assess the relationship between cryptocurrencies and traditional asset classes, data … Read More