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J. Risk Financial Manag., Volume 3, Issue 1 (December 2010), Pages 1-138

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Research

Open AccessArticle Conserving Capital by Adjusting Deltas for Gamma in the Presence of Skewness
J. Risk Financial Manag. 2010, 3(1), 1-25; doi:10.3390/jrfm3010001
Published: 31 December 2010
Cited by 4 | PDF Full-text (207 KB)
Abstract
An argument for adjusting Black Scholes implied call deltas downwards for a gamma exposure in a left skewed market is presented. It is shown that when the objective for the hedge is the conservation of capital ignoring the gamma for the delta [...] Read more.
An argument for adjusting Black Scholes implied call deltas downwards for a gamma exposure in a left skewed market is presented. It is shown that when the objective for the hedge is the conservation of capital ignoring the gamma for the delta position is expensive. The gamma adjustment factor in the static case is just a function of the risk neutral distribution. In the dynamic case one may precompute at the date of trade initiation a matrix of delta levels as a function of the underlying for the life of the trade and subsequently one just has to look up the matrix for the hedge. Also constructed are matrices for the capital reserve, the pro¯t, leverage and rate of return remaining in the trade as a function of the spot at a future date in the life of the trade. The concepts of pro¯t, capital, leverage and return are as described in Carr, Madan and Vicente Alvarez (2010). The dynamic computations constitute an application of the theory of nonlinear expectations as described in Cohen and Elliott (2010). Full article
Open AccessArticle Hedging Performance and Multiscale Relationships in the German Electricity Spot and Futures Markets
J. Risk Financial Manag. 2010, 3(1), 26-62; doi:10.3390/jrfm3010026
Published: 31 December 2010
PDF Full-text (457 KB)
Abstract
We explore optimal hedge ratios and hedging effectiveness for the German electricity market. Given the increasing attention that wavelets received in the financial market, we concentrate on the investigation of the relationship, covariance/coherence evolution and hedge ratio analysis, on a time-frequency-scale approach [...] Read more.
We explore optimal hedge ratios and hedging effectiveness for the German electricity market. Given the increasing attention that wavelets received in the financial market, we concentrate on the investigation of the relationship, covariance/coherence evolution and hedge ratio analysis, on a time-frequency-scale approach (discrete and continuous), between electricity spot and futures. Simpler approaches are also used for comparison purposes like the naïve, OLS and the dynamic multivariate GARCH model in order to account for risk reduction through hedging. Results allow us to conclude that: dynamic hedging strategies provide higher variance reductions in terms of hedging effectiveness; there is poor correlation among spot and futures, not being homogeneous across scales, which condition the effectiveness of the hedging strategy; the long-horizon hedge ratio does not converge to its long run equilibrium of one. Wavelets poor fit in variance reduction is attributed to low coherence and to statistical relationships between spot and futures electricity series. The instability found in various aspects of market comovements may imply serious limitations to the investor’s ability to exploit potential benefits from hedging with futures contracts in electricity markets. Moreover, much variation in the contemporaneous relationship among spot and futures may highlight inadequacy in assuming (short-term) relationships in both markets, which might account for the difficulty in achieving profitable active trading. Full article
Open AccessArticle Soybean Futures Crush Spread Arbitrage: Trading Strategies and Market Efficiency
J. Risk Financial Manag. 2010, 3(1), 63-96; doi:10.3390/jrfm3010063
Published: 31 December 2010
Cited by 1 | PDF Full-text (75 KB)
Abstract
This paper revisits the soybean crush spread arbitrage work of Simon (1999) by studying a longer time period, wider variety of entry and exit limits, and the risk-return relationship between entry and exit limits. The lengths of winning and losing trades are [...] Read more.
This paper revisits the soybean crush spread arbitrage work of Simon (1999) by studying a longer time period, wider variety of entry and exit limits, and the risk-return relationship between entry and exit limits. The lengths of winning and losing trades are found to differ systematically, with winning trades significantly shorter on average than losing trades. Exiting trades near the 5- day moving average is shown to improve trade performance relative to a reversal of sign and magnitude from the entry spread. These results lead to trading rules designed to prevent lengthy trades; however, the profitability of trading rules is found to be unstable. Full article
Open AccessArticle A Mean-Variance Diagnosis of the Financial Crisis: International Diversification and Safe Havens
J. Risk Financial Manag. 2010, 3(1), 97-117; doi:10.3390/jrfm3010097
Published: 31 December 2010
PDF Full-text (149 KB)
Abstract
We use mean-variance analysis with short selling constraints to diagnose the effects of the recent global financial crisis by evaluating the potential benefits of international diversification in the search for ‘safe havens’. We use stock index data for a sample of developed, [...] Read more.
We use mean-variance analysis with short selling constraints to diagnose the effects of the recent global financial crisis by evaluating the potential benefits of international diversification in the search for ‘safe havens’. We use stock index data for a sample of developed, advanced-emerging and emerging countries. ‘Text-book’ results are obtained for the pre-crisis analysis with the optimal portfolio for any risk-averse investor being obtained as the tangency portfolio of the All-Country portfolio frontier. During the crisis there is a disjunction between bank lending and stock markets revealed by negative average returns and an absence of any empirical Capital Market Line. Israel and Colombia emerge as the safest havens for any investor during the crisis. For Israel this may reflect the protection afforded by special trade links and diaspora support, while for Colombia we speculate that this reveals the impact on world financial markets of the demand for cocaine. Full article
Open AccessArticle Are Entrepreneur-Led Companies Better? Evidence from Publicly Traded U.S. Companies: 1998-2010
J. Risk Financial Manag. 2010, 3(1), 118-138; doi:10.3390/jrfm3010118
Published: 31 December 2010
Cited by 1 | PDF Full-text (233 KB)
Abstract
Do U.S. publicly-traded companies led by entrepreneurs perform better than nonentrepreneur-led U.S. public companies? Our data suggests they do. We analyze monthly stock returns of U.S. publicly traded companies over the time period 1998-2010 and find compelling evidence demonstrating that irrespective of [...] Read more.
Do U.S. publicly-traded companies led by entrepreneurs perform better than nonentrepreneur-led U.S. public companies? Our data suggests they do. We analyze monthly stock returns of U.S. publicly traded companies over the time period 1998-2010 and find compelling evidence demonstrating that irrespective of market capitalization and time period, companies led by U.S. entrepreneurs provide better stock performance than several stock market indices primarily comprised of non-entrepreneur-led U.S. companies. Full article

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