Riskiness-minimizing spot-futures hedge ratio

Time diversification which is the idea of there being less riskiness over longer investment horizons is examined in this paper. Different from previous studies, this paper contributes to the literature by using the Aumann and Serrano index as a risk measure to examine whether there is any time diversification in stock investment by using the daily returns of S&P 500, S&P 400, and NASDAQ with both short and long holding periods and by using the block bootstrapping technique in the simulation. The advantage of using the Aumann and Serrano index as a risk measure is that it satisfies the monotonicity with respect to stochastic dominance while most of other risk measures do not. From the returns of short (long) holding periods, we conclude that, in general, the riskiness of the shorter (longer) period is statistically greater than that of the longer (shorter) period. Our findings reject the hypothesis of no time diversification effect and reject the geometric Brownie motion process for the returns of different holding periods. The results could be due to short- and medium-term momentums and long-term contrarian. Our findings are useful to academics, investors, and policy makers in their decision-making related to time diversification.

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“…Furthermore, in studying the hedge with futures, Chen, Ho, and Tzeng (2014) proposed the optimal hedge ratio that minimizes the AS index.…”

Section: Introductionmentioning

confidence: 99%

Time Diversification: Perspectives From the Economic Index of Riskiness

Yang

Wong

2018

Ann. Finan. Econ.

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“…Although the four models of asset return dynamics considered in this paper are somehow standard, closed-form solutions for the EPI and economic risk index are unavailable. Therefore, we follow the approach of Chen et al (2014) to compute the EPI and economic risk index. Formally, we consider the following unconstrained minimization problem:…”

Section: The Monte Carlo Simulation Methodsmentioning

confidence: 99%

“…Step 3: Calculate the economic index of riskiness, and the sample mean using the last 50,000 observations generated from Step 2. 17 Following Chen et al (2014), the numerical optimization procedure is implemented using the OPTMUM procedure of the Gauss program.…”

Section: The Monte Carlo Simulation Methodsmentioning

confidence: 99%

How Did the Asset Markets Change after the Global Financial Crisis?

Chang

Leung

2021

SSRN Journal

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The Global Financial Crisis (GFC) changes the relative economic riskiness and risk-adjustedperformance of different asset markets. While the empirical distribution for stock return shifted to the right and became more concentrated around the mean after the GFC, the real estate market counterparts moved to the left and became more spread out. The economic risk of the OFHEO and Case-Shiller housing indices was smaller than the counterpart of the equity REIT (EREITs) market before the financial crisis, it substantially increased. Also, the economic performance of the OFHEO and Case-Shiller housing indices decreased after the financial crisis. They are below the performance indices of the stock and EREITs markets. The ex-post real estate premium vanishes.If we presume the "best model" to be the same before and after the GFC, we could severely misestimate the risk after the GFC.

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“…Homm and Pigorsch (2012) constructed an economic performance measure (EPM), which generalizes the Sharpe ratio by replacing SD with the AS index. In studying the hedge with futures, Chen, Ho, and Tzeng (2014) proposed the optimal hedge ratio that minimizes the AS index instead of variance. Furthermore, Chen, Huang, Shih, and Tzeng (2017) derived some new capital asset pricing models under some indexes of riskiness including the AS index.…”

Section: Introductionmentioning

confidence: 99%

“…Homm and Pigorsch (2012) demonstrate that the EPM produces different rankings from the Sharpe ratio on hedge fund index performance, but on the performance of stock mutual funds they produce similar ranking results. The minimum variance hedge ratios are significantly higher than the optimal hedge ratios, minimizing the AS index (Chen et al, 2014). Chen et al (2017) show that the beta of the mean–variance asset pricing model inaccurately evaluates the systematic risk.…”

Section: Introductionmentioning

confidence: 99%

Which measure of systematic risk should we use? An empirical study on systematical risk and Treynor measure using the economic index of riskiness and operational measure of riskiness

Cheung

Hoang

et al. 2020

Int. J Fin Econ

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This paper empirically studies the differences among the systematic risks of three asset pricing models, namely; the mean–variance capital asset pricing model (MV‐CAPM), AS‐CAPM and FH‐CAPM. The last two are derived by replacing variance with the Aumann‐Serrano (AS) index and the Foster‐Hart (FH) as the risk measure in MV‐CAPM. We use the Dow Jones Industrial Average (DJIA) index as a proxy for the market portfolio, and its component stocks to check if the systematic risks and the Treynor measures are different. The monthly return data from January 1997 to October 2017 are used for empirical estimations. The results show that the three systematic risks are highly correlated. Similarly, high correlation is also found for the three Treynor measures. It seems that even though they are derived under different risk measures, they produce almost the same systematic risk and performance measure for individual stocks. Therefore the findings of the present study suggest that any of the above measures can be used in empirical finance in the area of risk management. As this finding is different from those of other studies in the existing literature in this area, this study makes a contribution to the finance literature.

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Riskiness-minimizing spot-futures hedge ratio

Cited by 24 publications

References 23 publications

Time Diversification: Perspectives From the Economic Index of Riskiness

Time Diversification: Perspectives From the Economic Index of Riskiness

How Did the Asset Markets Change after the Global Financial Crisis?

Which measure of systematic risk should we use? An empirical study on systematical risk and Treynor measure using the economic index of riskiness and operational measure of riskiness

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