Glossary: terms starting with K

A method that estimates a changing state, which cannot be observed directly, from noisy measurements and updates it a little with each new observation. In pairs trading it estimates a hedge ratio that changes over time, without a fixed estimation window.

Source: Kalman (1960); Chan (2013)

More: Pairs trading and statistical arbitrage: idea, methods, research · Methodology: Long/short and statistical arbitrage: methodology

Framework for the attribution of international portfolios: each foreign return is split into a market premium over the local money market rate and a currency return including the interest rate differential, and the Brinson decomposition is then calculated separately for markets and currencies.

Source: Karnosky and Singer (1994)

More: Multi-asset attribution: weighting schemes, top-down and bottom-up, currencies and overlays

The fraction of capital that maximizes long-term wealth growth. For a bet with win probability p and odds b it is p − (1 − p) / b; staking more lowers growth again.

Example: A 60% chance of winning at even odds (b = 1): 0.6 − 0.4 / 1 = 20% of capital.

Source: Kelly (1956); Thorp (2006)

More: The Kelly criterion: how much to bet for maximum growth

Short mandatory document under the PRIIPs Regulation for funds, certificates and insurance-based investment products, with fixed sections on the product, risks and performance scenarios, costs and holding period. For UCITS, it has applied since 2023.

Source: PRIIPs Regulation (2014)

More: Portfolio reporting: how to report return, risk, attribution and costs properly

Interest rate set by the central bank at which banks can borrow or deposit money. In the euro area, the deposit facility rate has been the decisive key rate since 2024.

Methodology: Macro dashboard and regime analysis: methodology

Interest rate risk per maturity point: how strongly a portfolio reacts when only the rate for one maturity (say 10 years) rises. Together they add up to the duration.

More: Duration: how strongly bonds react to interest rates

Premium at which bitcoin traded in South Korea relative to the US, up to 40% on several days from December 2017 to February 2018. Capital controls prevented arbitrage from closing it.

Source: Harvard Law School Forum (2019)

The tailedness of a distribution: how much weight lies in the tails? The normal distribution has a kurtosis of 3 (excess kurtosis 0); returns usually have more, so extreme values occur more often.

More: Skewness and kurtosis: why market crashes are more frequent than the normal distribution says