Tail Risk Hedging: The Search For Cheap Options,
Singapore Management University
Tail Risk Hedging: The Search For Cheap Options, Chyng Wen Tee
Research Collection Lee Kong Chian School Of Business
The authors find that a simple heuristic of sorting liquid equity options by dollar price to construct a portfolio of cheap put options leads to a surprisingly robust hedge for tail risk – the superior performance holds even when compared against more advanced empirical strategies. Further investigation reveals the asymmetry in market correlation under different market conditions as the mechanism of this robust hedging performance. The cheap options selected by the heuristic comprises of stocks with diverse firm characteristics. The correlation spike accompanying tail risk events leads to the majority of these put options moving into-the-money (ITM), thus compensating the …
Radicalization Into Violent Extremism I: A Review Of Social Science Theories,
University of South Florida
Radicalization Into Violent Extremism I: A Review Of Social Science Theories, Randy Borum
Journal of Strategic Security
In discourse about countering terrorism, the term "radicalization" is widely used, but remains poorly defined. To focus narrowly on ideological radicalization risks implying that radical beliefs are a proxy—or at least a necessary precursor—for terrorism, though we know this not to be true.Different pathways and mechanisms of terrorism involvement operate in different ways for different people at different points in time and perhaps in different contexts. This article explores the problems in defining radicalization and radicalism, and suggests that radicalization—and more specifically, involvement in terrorism—might best be viewed as a set of diverse processes. It goes on to review several …
A Transaction Cost Perspective On Option Anomalies,
Singapore Management University
A Transaction Cost Perspective On Option Anomalies, Gloria Yang Yu
Research Collection Lee Kong Chian School Of Business
We examine the impact of transaction costs on the profitability of long-short portfolios of delta-hedged option returns. Of the 24 portfolio sort variables studied, 17 generate positive and significant gross returns, but none remain profitable after accounting for trading costs. We propose a cost-mitigation approach that restores profitability to 7 key portfolios. Furthermore, we demonstrate that the choice of delta-hedging frequency has a first-order impact on transaction costs. Our findings underscore the central role of implementation costs in shaping the investment opportunity set in equity–option markets, highlighting the need to account for transaction costs when evaluating option-based strategies.
Option Market Maker Hedging And Stock Market Liquidity,
Singapore Management University
Option Market Maker Hedging And Stock Market Liquidity, Gloria Yang Yu
Research Collection Lee Kong Chian School Of Business
This paper demonstrates that option market maker hedging impacts the liquidity of underlying stocks. Options contracts have zero net supply, and option market makers engage in delta hedging to manage the risk of their net imbalances, unlike option end-users. Consequently, when option market makers hold a net short (long) position, their dynamic hedging demands liquidity from (or supplies liquidity to) the underlying stock, leading to market destabilization (or stabilization). Leveraging proprietary option exchange data that categorizes option trading by trader type, we document this effect and show that it is stronger for stocks where liquidity supply is expected to be …
Political Terrorism: An Historical Case Study Of The Italian Red Brigades,
University of South Florida
Political Terrorism: An Historical Case Study Of The Italian Red Brigades
Journal of Strategic Security
As the world's governments become increasingly engulfed in economic and political strife, international leaders should step back and understand what historical realities enabled political extremism to surface in particular regions of the world. More important, these leaders need to recognize what past governments did to counter these movements. Global communities are currently witnessing a dynamic trend of populous uprisings that in some cases, like Greece and the United States, have the potential to severely disrupt the activities of local governments. Consequently, it behooves leaders to reflect upon historical precedence in order to avoid repeating the same mistakes of our forefathers. …
Idiosyncratic Risk And The Cross-Section Of Expected Stock Returns,
Singapore Management University
Idiosyncratic Risk And The Cross-Section Of Expected Stock Returns, Fangjian Fu
Research Collection Lee Kong Chian School Of Business
Theories such as Merton (1987, Journal of Finance) predict a positive relation between idiosyncratic risk and expected return when investors do not diversify their portfolio. Ang, Hodrick, Xing, and Zhang (2006, Journal of Finance 61, 259-299) however find that monthly stock returns are negatively related to the one-month lagged idiosyncratic volatilities. I show that idiosyncratic volatilities are time-varying and thus their findings should not be used to imply the relation between idiosyncratic risk and expected return. Using the exponential GARCH models to estimate expected idiosyncratic volatilities, I find a significantly positive relation between the estimated conditional idiosyncratic volatilities and expected …
Implications Of Transaction Costs For The Post-Earnings-Announcement Drift,
Singapore Management University
Implications Of Transaction Costs For The Post-Earnings-Announcement Drift, Jeffrey Ng
Research Collection School Of Accountancy
This paper examines the effect of transaction costs on the post–earnings announcement drift (PEAD). Using standard market microstructure features we show that transaction costs constrain the informed trades that are necessary to incorporate earnings information into price. This implies weaker return responses at the time of the earnings announcement and higher subsequent returns drift for firms with higher transaction costs. Consistent with this prediction, we find that earnings response coefficients are lower for firms with higher transaction costs. Using portfolio analyses, we find that the profits of implementing the PEAD trading strategy are significantly reduced by transaction costs. In addition, …
Persistence In Style-Adjusted Mutual Fund Returns,
Singapore Management University
Persistence In Style-Adjusted Mutual Fund Returns, Melvyn Teo
Research Collection Lee Kong Chian School Of Business
The literature on mutual fund persistence took a hit with the finding that one-year stock momentum and expense ratios account for most of the persistence in mutual fund performance (Carhart, 1992; Carhart, 1997). However, since equity mutual funds are grouped into styles (e.g., large value, small growth, mid-cap growth, etc.) and are often confined to trading stocks within their style, one should measure fund performance relative to style when investigating managerial ability. Using CRSP mutual fund data and a methodology similar to Carhart (1997), we find that differences in style-adjusted fund returns persist for up to six years. Neither one-year …
Abnormal Trading Volume, Stock Returns And The Momentum Effects,
Singapore Management University
Abnormal Trading Volume, Stock Returns And The Momentum Effects, Ying Zheng
Dissertations and Theses Collection (Open Access)
This paper intends to study the intermediate-term momentum and long-term reversal of stock prices by investigating the informational role of unusual trading volume for winner and loser stocks. I argue that unusual trading volume has different implications for winner and loser stocks. Specifically, high trading volume for losers is driven by purchases made by informed investors; while high trade volume for winners could be driven by either information or representativeness bias or both. The arguments are tested in the paper by showing that in the short run, losers/winners with high abnormal trading volume outperform losers/winners with low abnormal trading volume; …
The Price Discovery Puzzle In Offshore Yuan Trading: Different Contributions For Different Contracts,
Singapore Management University
The Price Discovery Puzzle In Offshore Yuan Trading: Different Contributions For Different Contracts, David K. Ding
Research Collection Lee Kong Chian School Of Business
The People's Bank of China (PBC) lifted yuan trading restrictions in July of 2010 that led to offshore yuan spot trading in Hong Kong. Based on causality analyses, we find that price discovery is absent between the onshore and offshore spot markets. However, we document the presence of price discovery between onshore spot and offshore nondeliverable forward (NDF) rates. These seemingly inconsistent results present a puzzle wherein one offshore market appears to be more informationally integrated with the onshore market than another. We conclude that price discovery differences in the offshore markets stem from the offshore spot and forward contracts …
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