Financial risk means the uncertainty of a return and the potential for both financial loss and gain. It is crucial for asset allocation and risk management decisions of individuals, portfolio managers and firms.

Long-term and short-term investors interact in financial markets to determine asset prices. Long-term investors, such as mutual funds and pension funds, are exposed to risk over months and years, while short-term investors as day-traders and high-frequency traders, care more about risk on a daily, or even intra-daily, basis. Financial risk typically evolves over time as the state of the economy changes and new information is released. As investors care about risk over different time horizons, they react differently to information and news. Hence, financial risk in the long term depends on a different set of information and news than risk in the short term.

In this project we develop a model that separates the risk related to long-term fundamental factors from short-term fluctuations driven by investors’ sentiment. The model is used to explain cross-sectional differences in expected equity returns and to examine risk spillover across different financial markets. We examine the effect of high frequency news releases on market risk in order to disentangle short-term fluctuations related to investors’ reactions from long-term effect of news. We also analyze long-term and short-term market risk from a market microstructure perspective.

 

Project time: 2016-2019

Funding: 1.000.000 SEK, the Jan Wallander and Tom Hedelius foundation, and the Tore Browaldh foundation.

Researchers: Lars Nordén (SBS), Ai Jun Hou (SBS), Hossein Asgharian (Lund University) and Charlotte Christiansen (Aarhus University)

Contact: Lars Nordén