Performance evaluation with high moments and disaster risk

Kadan, Ohad; Liu, Fang

doi:10.1016/j.jfineco.2014.03.006

Cited by 64 publications

(30 citation statements)

References 52 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…After standardization, however, only the expected shortfall of the German market portfolio remains higher than that of its UMD counterpart. Overall, our statistics presented here are consistent with those reported by Daniel and Moskowitz (2014) and Kadan and Liu (2014), who also found that momentum tends to suffer from severe left-tail risks.…”

Section: Summary Statistics: First and Secondsupporting

confidence: 92%

“…Eun, Huang, and Lai (2008) and Eun et al (2010) studied the benefits of holding internationally diversified style portfolios but did not examine how such portfolios perform during extreme periods. Both Daniel and Moskowitz (2014) and Kadan and Liu (2014) showed that momentum exhibits significant left-tail risks but did not examine whether these risks can be diversified internationally. Asness, Moskowitz, and Pedersen (2013) and asset classes.…”

mentioning

confidence: 99%

See 1 more Smart Citation

The Crash Risks of Style Investing: Can They Be Internationally Diversified?

Chue

WangYong

XUJin

2015

Financial Analysts Journal

View full text Add to dashboard Cite

The crash risks of momentum tend to be higher than those of size and value. International diversification lowers the crash risks of size and value but not momentum. The authors examined the conditional correlations and return co-exceedances of style portfolios across countries and found that this difference in the effect of diversification is due to the left (right) tails of momentum (size and value) portfolios being more correlated than the right (left) tails across countries.S tyle investing has grown in popularity among investors. Even at the retail level, as of 2008, there were more than 2,000 mutual funds and exchange-traded funds in the United States with a market-capitalization or value/growth focus. 1 According to statistics reported by Eun, Lai, de Roon, and Zhang (2010), such products are also becoming widely available in other developed countries. With respect to momentum, Jegadeesh and Titman (1993, p. 66) observed that "a majority of the mutual funds examined by Grinblatt and Titman (1989, 1993) show a tendency to buy stocks that have increased in price over the previous quarter."Many studies that have examined extreme events in the international equity market have focused on developing countries (see, e.g., Forbes and Rigobon 2002;Bae, Karolyi, and Stulz 2003;Bekaert, Harvey, and Ng 2005), but the recent financial crisis reminds us that even developed stock markets are not immune to crashes and tail risks. Taleb (2007) and Reinhart and Rogoff (2009), together with many others in the financial press, have also advised investors to pay more attention to these "rare" events.Motivated by the growth in popularity of style investing and the concerns about extreme events among investors, we examined the tail risks of style investing in the G-7 countries (Canada, France, Germany, Italy, Japan, United Kingdom, and United States) over 1981-2010. We evaluated whether portfolios with different size, value, or momentum tilts-the SMB (small minus big), HML (high minus low), and UMD (up minus down, or past winners minus past losers) portfolios-experience different crash risks and whether these risks can be mitigated through international diversification.■ Discussion of findings. Using both expected shortfall and return skewness as measures, we found that the left-tail risks of UMD are significantly higher than those of SMB and HML. 2 For diversified "world" portfolios (equal-weighted portfolios of the G-7 countries), this difference in left-tail risks across styles is even greater. By calculating conditional correlations (i.e., correlations conditional on returns of different magnitudes) and co-exceedances (i.e., joint occurrences of extreme returns) across countries, we found that the extreme negative returns on UMD in different markets tend to occur together, whereas those on SMB and HML tend to be country specific. In fact, for SMB and HML, the right-tail events tend to be more global in nature. These results suggest that momentum crashes cannot be diversified away internationally and explain why internatio...

show abstract

Section: Summary Statistics: First and Secondsupporting

confidence: 92%

mentioning

confidence: 99%

The Crash Risks of Style Investing: Can They Be Internationally Diversified?

Chue

WangYong

XUJin

2015

Financial Analysts Journal

View full text Add to dashboard Cite

show abstract

“…The second approach is based on recent work by Kadan and Liu (), who show how to evaluate investment performance in a way that accounts for higher moments by using the generalized risk measures of Aumann and Serrano () and Foster and Hart (). The performance indexes they construct,

P^{AS}

and

P^{FH}

, are the solutions to

E [exp false(- P^{AS} (1 + R) false)] = 1

and

E [log false(1 + P^{FH} (1 + R) false)] = 0 .

As with the other statistics in the table, we estimate them using the generalized method of moments (GMM).…”

Section: Risk and Risk Aversionmentioning

confidence: 99%

“…CE (gamma = γ ) refers to the certainty-equivalent rate for a CRRA investor with a risk aversion of γ . P AS and P FH are the performance indices of Kadan and Liu (2014) using the risk measures of Aumann and Serrano (2008) kurtosis of the hedged call portfolio, but they nevertheless raise the possibility of a relation between risk and return. 16 When we undertake the kind of risk adjustment that would be appropriate in a Gaussian setting or for investors with mean-variance preferences, we see that the greater risks associated with nontrading returns have little effect on the relative attractiveness of writing options over nontrading rather than trading periods.…”

Section: Risk and Risk-adjusted Performancementioning

confidence: 99%

Option Mispricing around Nontrading Periods

Jones

Shemesh

2018

The Journal of Finance

View full text Add to dashboard Cite

We find that option returns are significantly lower over nontrading periods, the vast majority of which are weekends. Our evidence suggests that nontrading returns cannot be explained by risk, but rather are the result of widespread and highly persistent option mispricing driven by the incorrect treatment of stock return variance during periods of market closure. The size of the effect implies that the broad spectrum of finance research involving option prices should account for nontrading effects. Our study further suggests how alternative industry practices could improve the efficiency of option markets in a meaningful way.

show abstract

“…A similar exercise was conducted inKadan and Liu (2014) in order to benchmark their newly proposed performance measure.…”

mentioning

confidence: 99%

Unequal returns: Using the Atkinson index to measure financial risk

Fischer

Lundtofte

2020

Journal of Banking & Finance

View full text Add to dashboard Cite

We apply the Atkinson (1970) inequality index to time series of asset returns to offer a novel measure of financial risk consistent with expected-utility theory. This measure is converted to a certainty-equivalent return serving as a performance measure. We extend the Atkinson index to HARA utility and derive closed-form solutions to our measures for a number of preferencereturn combinations. Further, we establish relationships between risk aversion and the weights assigned to the cumulants of the return distribution for our performance measure. Using data from hedge funds and asset-pricing anomalies, we find that our performance measure contains additional, economically meaningful information.

show abstract

Performance evaluation with high moments and disaster risk

Cited by 64 publications

References 52 publications

The Crash Risks of Style Investing: Can They Be Internationally Diversified?

The Crash Risks of Style Investing: Can They Be Internationally Diversified?

Option Mispricing around Nontrading Periods

Unequal returns: Using the Atkinson index to measure financial risk

Contact Info

Product

Resources

About