Value of hedge and expected returns |
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Authors: | Jinpeng Ma Max Tang Yuming Wang |
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Institution: | 1. Department of Economics, Rutgers University, Camden, NJ, USA;2. DHCS, Sacramento, CA, USA;3. School of Finance, Shanghai University of Finance and Economics, Shanghai, China |
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Abstract: | We demonstrate how it is possible to generate value for an investor with a hedge attached to the buy-and-hold strategy of an S&P 500 index fund. We study the S&P 500 index portfolio (not including dividends) and the value-weighted S&P 500 index portfolio (including dividends) of the Center for Research in Securities Prices for 1967:01–2011:12, using the capacity utilization and the unemployment rates in real time to determine if a hedge position should be initiated or closed. A hedge is initiated if the capacity utilization, the unemployment rate or a combination of the two signals a contraction in the real economy. The hedge position is closed if it signals otherwise an expansion. We use utility gains (Campbell and Thompson 2008), the manipulation-proof performance measure (MPPM) statistics (Ingersoll et al. 2007) and the P-Sharpe ratio (Bailey and López de Prado 2012) to evaluate the performance of a particular hedge strategy. The empirical results show that there are infinitely many hedges that can generate positive utility gains, higher MPPM statistics and higher P-Sharpe ratios. |
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Keywords: | Hedge strategies index portfolios business cycle P-Sharpe ratios the Sharpe ratio efficient frontier equal and value-weighted S& P 500 indices |
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