Minimum variance and equally-weighted portfolios have recently prompted great interest both from academic researchers and market practitioners, as their construction does not rely on expected average returns and is therefore assumed to be robust. In this paper, we consider a related approach, where the risk contribution from each portfolio components is made equal, which maximizes diversication of risk (at least on an ex-ante basis). Roughly speaking, the resulting portfolio is similar to a minimum variance portfolio subject to a diversication constraint on the weights of its components. We derive the theoretical properties of such a portfolio and show that its volatility is located between those of minimum variance and equally-weighted portfolios. Empirical applications conrm that ranking. All in all, equally-weighted risk contributions portfolios appear to be an attractive alternative to minimum variance and equally-weighted portfolios and might be considered a good trade-o between those two approaches in terms of absolute level of risk, risk budgeting and diversication.
Hedge fund replication based on factor models is encountering growing interest. In this paper, we investigate the implications of substituting standard rolling windows regressions, which appear ad-hoc, with more efficient methodologies like the Kalman filter. We show that the copycats constructed this way offer risk-return profiles which share several characteristics with the ones posted by hedge funds indices: Sharpe ratios above buy-and-hold strategies on standard assets, moderate correlation with standard assets and limited drawdowns during equity downward trends. An interesting result is that the shortfall risk seems less important than with hedge fund indices and regressions based-trackers. We finally propose new breakdowns of hedge fund performance into alpha, traditional beta and alternative beta.Hedge fund replication has become highly fashionable during recent months. Under this generic term, three main approaches can be identified:• Mechanical duplication of strategies. A growing number of investment banks are proposing products which aims to reproduce in a systematic and quantitative manner a strategy followed by hedge funds. For instance, several investable indices have been proposed which mark-tomarket systematic short of put options or variance swaps. Thanks to the positive premia between implied and realized volatilities, this kind of strategy seems able to generate superior Sharpe ratios while exposing to the risk of huge losses when the underlying asset plunges (Lo [2005], Goeztmann et al. [2007] • Replication of distribution. A very different approach has been advocated by Kat and Palaro [2007]. Their postulate is that investors enter into hedge funds for their characteristics in terms of expected returns, volatility and correlation, not for their month-by-month return. While the argument might be generalized to other assets, it is probably all the more meaningful as diversification is a major motivation for investing in hedge funds. In practice, the copycat is based on a passive futures trading strategies 1 . The investor first determines its existing portfolio (for instance, an equally-weighted mix of US Treasuries and S&P 500), the futures he wants to trade and then the statistical properties in terms of correlation with the existing portfolio, shortfall probability, skewness sign, etc. The investor then receives the line-up of the strategy: that is the daily trading volume of each futures contract he has to trade to replicate the fictive option so that in the end the fund has the desired properties. However, there is no indication on how long it will take for this result to materialize and,
The purpose of this paper is to analyze the impact of the Bank of Japan's official interventions on the JPY/USD parity during the period 1992-2004. The novelty of our approach is to combine two recent advances of the empirical literature on foreign exchange interventions: (i) drawing on over-the-counter option prices to characterize more precisely the distribution of market expectations; (ii) redefining interventions in terms of events as they tend to come in clusters. Moreover, in order to deal with the features of the data (small sample size, non-standard distribution), we use bootstrap tests.We show that interventions have a significant impact on the mean expectation (the forward rate). The results are more ambiguous for variance. Additionally, we find that the effect of interventions on skewness is significant, robust to different definitions of skewness, and consistent with the direction of interventions. On the contrary, our results clearly show that kurtosis is not affected by interventions. We finally show that: (i) coordination increases effectiveness of interventions; (ii) results are not altered when controlling for other economic and political news.
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