Optimal Hedging and the Partial Loss Offset Provision

In this paper, we examine how taxation affects the optimal hedging behaviour of an investor exposed to price risk under partial loss offset provision. In this regime, only part of the loss is refunded through the tax. As such, it implies a non-linearity in the taxation schedule. More specifically, we look at an individual endowed with some fixed quantity of a commodity and facing a price risk. The optimal hedging policy is derived. The comparative statics of a tightening of the PLO provision and a changing risk aversion are analysed. We show that the response of the optimal hedging policy to a change in the tax rate can be signed by a preference free or a preference related sufficient condition, involving the notions of cost-of-carry and partial risk aversion.     

Hedging effectiveness under conditions of asymmetry

We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail-specific metrics, for example, value at risk, to compare the hedging effectiveness of short and long hedgers. Comparisons are applied to a number of hedging strategies including OLS and both symmetric and asymmetric generalised autoregressive conditional heteroskedastic models. We apply our analysis to a dataset consisting of S&P500 index cash and futures containing symmetric and asymmetric return distributions chosen ex post. Our findings show that asymmetry reduces out-of-sample hedging performance and that significant differences occur in hedging performance between short and long hedgers.     

Hedging Corporate Bonds

We examine Treasury bond and stock index futures, the swap curve and two types of hypothetical corporate bond assets as alternative hedging instruments for portfolios of corporate bonds. Conducting ex post and ex ante tests we find evidence that credit quality and maturity are important sources of basis risk when hedging corporate bonds whose credit rating are below triple A. We conclude that a new corporate hedging instrument may be useful for those wishing to hedge corporate bond portfolios provided that transaction costs are not too high relative to existing futures contracts.     

Managerial Ownership and Corporate Hedging

Abstract:  Using information on 443 UK non-financial companies, this work provides evidence supporting the hypothesis that managerial risk aversion is an incentive to deviate from the optimal hedging position. Conflicts of interest between shareholders and managers are at the centre of the decision about the firm's risk profile but are not relevant as determinants of the decision to hedge. This is rather associated with factors enhancing the firm's expected value (underinvestment, scale economies, tax savings).     

Hedging Housing Risk*

An unusually rich source of data on housing prices in Stockholm is used to analyze the investment implications of housing choices. This empirical analysis derives market-wide price and return series for housing investment during a 13-year period, and it also provides estimates of the individual-specific, idiosyncratic, variation in housing returns. Because the idiosyncratic component follows an autocorrelated process, the analysis of portfolio choice is dependent upon the holding period. We analyze the composition of household investment portfolios containing housing, common stocks, stocks in real estate holding companies, bonds, and t-bills. For short holding periods, the efficient portfolio contains essentially no housing. For longer periods, low-risk portfolios contain 15 to 50 percent housing. These results suggest that there are large potential gains from policies or institutions that would permit households to hedge their lumpy investments in housing. We estimate the potential value of hedges in reducing risk to households, yet yielding the same investment returns. The value is surprisingly large, especially to poorer homeowners.     

盯市风险下的期货套期保值

本文把盯市风险引入传统的期货套期保值框架，论证了在考虑盯市风险的情况下，一个关注每日最大亏损值的套期保值者会显著地减少他的期货头寸。在一个中期的套期保值期内，该套期保值者的期货套期保值头寸约为其现货头寸的80％。盯市风险的影响随着套期保值期的延长而缓慢减弱。如果套期保值者关注的是每日平均亏损值，在一个中期的套期保值期内盯市风险的影响极小。     

Hedging Housing Risk in London

This paper investigates the benefits of allowing households to compensate the portfolio distortion due to their housing consumption through investments in housing price derivatives. Focusing on the London market, we show that a major loss from over-investment in housing is that households are forced to hold a very risky portfolio. However, the strong performance of the London housing market means that little is lost in terms of expected returns. Even households with limited wealth are better off owning their home rather than renting and investing in financial assets, as long as they are willing to face the financial risk involved. In this context, access to housing price derivatives would benefit most poor homeowners looking to limit their risk exposure. It would also benefit wealthier investors looking for the high returns provided by housing investments without the costs of direct ownership of properties. Comparisons with French, Swedish and U.S. data provide a broader perspective on our findings.     

Benefits from Asia-Pacific Mutual Fund Investments with Currency Hedging

This study presents empirical evidence on the efficiency and effectiveness of hedging U.S.-based international mutual funds with an Asia-Pacific investment objective. The case for active currency risk management is examined for a passive and a selective hedge, which is constructed with currency futures in the major currencies. Both static and dynamic hedging models are used to estimate the risk-minimizing hedge ratio. The results show that currency hedging improves the performance of internationally diversified mutual funds. Such hedging is beneficial even when based on prior optimal hedge ratios. Further, efficiency gains from hedging, as measured by the percent change in the Sharpe Index, are greatest under a selective portfolio strategy that is implemented with an optimal constant hedge ratio.     

Hedging derivatives with model error

The current derivatives pricing technology enables users to hedge derivatives with the underlying asset or any other traded derivative. In theory, there is no reason to prefer one hedging instrument to another. However, given model errors, this is not true. Imposing some simple assumptions on the structure of model errors, this paper shows that to maximize hedging accuracy, there is an ordering to the hedging instruments utilized. Holding constant market illiquidities, one should always hedge first with ‘like’ derivatives, next with derivatives one layer down the hierarchy of derivatives, and lastly using the underlying.     

An International Asset Pricing Model with Time-Varying Hedging Risk

This paper employs a two-factor international equilibrium asset pricing model to examine the pricing relationships among the world's five largest equity markets. In addition to the traditional market factor premium, a hedging factor premium is included as the second factor to explain the relationship between risks and returns in the international stock markets. Moreover, a GARCH parameterization is adopted to characterize the general dynamics of the conditional second moments. The results suggest that the additional hedging risk premium is needed to explain rates of return on international equities. Furthermore, the restriction that the coefficient on the hedge-portfolio covariance is one smaller than the coefficient on the market-portfolio covariance can not be rejected. This suggests that the intertemporal asset pricing model proposed by Campbell (1993) can be used to explain the returns on the five largest stock market indices.     

基于死亡率免疫理论的自然对冲有效性评估

为应对长寿风险对年金产品的影响,本文提出分段对冲策略,并以死亡率免疫和死亡率久期规则为理论基础探讨该策略的有效性问题。为避免传统久期匹配方法中参数估计误差的累积和传导,借助WinBUGS软件和贝叶斯Markov Chain Monte Carlo方法,在统一的计算框架下完成了死亡率预测、死亡率久期计算和对冲效果的数值模拟;并以4种分段组合准备金数据的三维图、方差缩减比(VRR)和VaR值为指标进行长寿风险对冲有效性的对比,结果表明低年龄寿险保单和高年龄年金保单组合具有最平滑的三维图,最小的VRR和VaR值,可明显提高长寿风险自然对冲的有效性。     

The Traditional Hedging Model Revisited with a Nonobservable Convenience Yield

This article examines the hedging of constrained commodity positions with futures contracts. We extend the study of Adler and Detemple (1988a, 1988b) to include a partial information framework where the convenience yield is not observable. As a consequence, futures prices depend on investor's beliefs regarding the value of the convenience yield, and every component of the hedge is impacted by these beliefs. We achieve a decomposition of the demand that clarifies the impact on the optimal hedge of the beliefs, the spot price and the risk‐free rate as well as the hedging horizon.     

Hedging errors with Leland's option model in the presence of transaction costs

Nonzero transaction costs invalidate the Black–Scholes [1973. Journal of Political Economy 81, 637–654] arbitrage argument based on continuous trading. Leland [1985. Journal of Finance 40, 1283–1301] developed a hedging strategy which modifies the Black–Scholes hedging strategy with a volatility adjusted by the length of the rebalance interval and the rate of the proportional transaction cost. Kabanov and Safarian [1997. Finance and Stochastics 1, 239–250] calculated the limiting hedging error of the Leland strategy and pointed out that it is nonzero for the approximate pricing of an European call option, in contradiction to Leland's claim. As a further contribution, we first identify the mathematical flaw in the argument of Leland's claim and then quantify the expected percentage of hedging losses in terms of the hedging frequency and the level of the option strike price.     

A Futures Duration-Convexity Hedging Method

A duration-based hedge ratio is the conventional method to hedge against price changes of a fixed-income instrument. However, the relationship between bond prices and interest rates is nonlinear, creating a convexity effect. Moreover, term structure changes often are nonparallel in nature, which causes imperfect hedges for the duration-based hedging model. One solution to these problems is to dynamically change the duration-based hedge ratio; however, this procedure is costly and is not effective when jumps in prices occur. A superior solution is to develop a two-instrument hedge ratio that simultaneously hedges both duration and convexity effects. This paper first presents such a two-instrument hedge ratio and then we examine its effectiveness. The simulation results show that this duration-convexity hedge ratio is vastly superior to alternative hedge ratio methods for both simple and complex changes in the term structure.     

Multiperiod Strip Hedging of Forward Commitments

This paper empirically compares two multiperiod hedging strategies—a strip hedge and a stack-and-roll hedge—to hedge a forward commitment. The multiperiod strip hedge is found to outperform the stack-and-roll hedge when forward prices are subject to multiple sources of price uncertainty and to perform no better when only one source of uncertainty is present. Moreover, the relative superiority of the strip hedge increases with the presence of multiple sources of uncertainty. Last, the strip hedge is found to be more costly to trade than the stack-and-roll hedge; however, its cost varies directly with its superiority at reducing risk.     

Currency Hedging Using the Mean-Gini Framework

The mean-Gini framework has been suggested as a robust alternative to the portfolio approach to futures hedging given its optimality under general distributional conditions. However, calculation of the Gini hedge ratio requires estimation of the underlying price distribution. We estimate minimum-Gini hedge ratios using two widely-used estimation procedures, the empirical distribution function method and the kernel method, for three emerging market and three developed market currencies. We find that these methods yield different Gini hedge ratios. These differences increase with risk aversion and are statistically significant for all developed market currencies but only one emerging market currency. In-sample analyses show that the empirical distribution function method is more effective at risk reduction than the kernel method for developed market currencies, whereas the kernel method is superior for emerging market currencies. Post-sample analyses strengthen the superiority of the empirical distribution function method for developed market and, in several cases, for emerging market currencies.JEL Classification: F31, G15     

沪深300ETF套期保值效果的比较研究

文章采用OLS、ECM、CCC-BGARCH以及DCC-BGARCH模型分别计算了两支300ETF的最优套期保值比率,并分别比较了两支300ETF的套期保值效果,结果发现：动态多元GARCH类模型的效果明显好于OLS和ECM模型;无论采用哪种模型,华泰柏瑞沪深300ETF的套期保值效果都要好于嘉实沪深300ETF;由于华泰柏瑞沪深300ETF的高流动性和相对完善的套利机制,使得其适合较大方差变化的DCC-BGARCH模型;而嘉实沪深300ETF采用CCC-BGARCH模型的套期保值效果更好,这可能是因为嘉实沪深300ETF和沪深300股指期货间的关联性波动较小,相关系数更接近于常数的缘故。