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Full-Text Articles in Business
The Relationship Between The Option-Implied Volatility Smile, Stock Returns And Heterogeneous Beliefs, Shu Feng, Yi Zhang, Geoffrey C. Friesen
The Relationship Between The Option-Implied Volatility Smile, Stock Returns And Heterogeneous Beliefs, Shu Feng, Yi Zhang, Geoffrey C. Friesen
Department of Finance: Faculty Publications
We study the relationship between stock returns and the implied volatility smile slope of call and put options. Stocks with a steeper put slope earn lower future returns, while stocks with a steeper call slope earn higher future returns. Using dispersion of opinion as a proxy for belief differences, we find that the slope-stock return relation is strongest for stocks with high belief differences. The idiosyncratic component of the put slope fully explains the negative risk-adjusted stock returns. For the call slope, the idiosyncratic component dominates the systematic one, and explains the positive risk-adjusted returns.
Hedge Fund Replication With A Genetic Algorithm: Breeding A Usable Mousetrap, Brian C. Payne, Jiri Tresl
Hedge Fund Replication With A Genetic Algorithm: Breeding A Usable Mousetrap, Brian C. Payne, Jiri Tresl
Department of Finance: Faculty Publications
This study tests the performance of 14 hedge fund index clones created using parsimonious outof- sample replication portfolios consisting solely of easily accessible assets. We employ a genetic algorithm to integrate two traditional hedge fund replication methods, the factor-based and payoff distribution replication methods, and evaluate over 4500 commonly held stocks, bonds and mutual funds as replicating portfolio components. In-sample performance indicates that hedge funds have return series similar to portfolios of commonly held assets, and out-of-sample results provide evidence that the in-sample relationships can hold with infrequent rebalancing. This hedge fund replication attempt rates well relatively to prior efforts …