Narrow Results

This study analyzes, prices and validates global macro strategies in the real estate investment trust (REIT) industry. For REITs, global macro strategies lead to a risk-alpha conundrum, which is rare in this industry. That is, global macro strategies are different in the REIT industry and therefore, global macro within the REIT industry needs a unique and different understanding.

Synopsis

The research problem

This study examines the association between hedge-based derivatives usage and stock price crash risk, as well as the moderating effect of International Financial Reporting Standard 9 — Financial Instruments (IFRS 9) hedge accounting requirements on the association between derivatives usage and stock price crash risk in China.

Motivation

A growing number of companies worldwide are using financial derivatives to hedge risks; however, evidence is mixed on whether hedge-based derivatives usage increases or decreases firm transparency. While prior studies have demonstrated that financial reporting complexity can affect the informational effect of derivatives, evidence is limited on whether and how the recent changes in hedge accounting requirements in IFRS 9 affect the capital market outcomes of derivatives. Using data from China, one of the largest emerging markets, we tested the informational effects of hedge-based derivatives usage and IFRS 9 requirements to provide incremental evidence on the market outcomes of firm use of financial derivatives. The findings have implications for international investors and facilitate the International Accounting Standards Board’s (IASB) postimplementation review of the IFRS 9 hedge accounting requirements.

The test hypotheses

Our first hypothesis is that no association exists between hedging and stock price crash risk in China. Our second hypothesis is that the implementation of IFRS 9 requirements does not influence the association between hedging and stock price crash risk in China.

Target population

This study is of interest to accounting and finance researchers, firm managers, accounting practitioners, international accounting standard setters, regulatory authorities, and investors.

Adopted methodology

Ordinary least squares (OLS) regressions, difference-in-differences (DiD) research design, propensity score matching (PSM), and entropy balancing (EB) are used in this research.

Analyses

We manually collected derivatives-related information (including purposes of derivatives usage, measurement basis of the derivatives, and hedge accounting treatment) from the annual reports of firms listed on the mainboard of the Shanghai and Shenzhen stock exchanges from 2016 to 2021. We adopted OLS and a DiD research design to test our hypotheses, and used the PSM and EB methods to address endogeneity concerns.

Findings

We find a positive association between hedging and stock price crash risk among the listed Chinese companies. Furthermore, after the implementation of IFRS 9, stock price crash risk decreases more among the hedgers than among firms without financial derivatives. Our channel tests show that IFRS 9 increases the quality of hedge accounting information, thus reducing stock price crash risk. The cross-sectional tests further support the capability of IFRS 9 to reduce noise contained in hedge accounting information, therefore improving firm-level transparency.

The ravages of COVID-19 have had a huge impact on the global economy, and in the grain market, grain prices have fluctuated greatly due to the impact of factors such as rising circulation costs and sudden panicky demand, which has increased the business risks of sellers and deep-processing enterprises. To effectively reduce and avoid the risks brought by COVID-19, this paper takes utility maximization as the goal and helps grain enterprises manage grain price risks by constructing optimal dynamic behavioral hedging strategies. Therefore, this paper first measures the corn price risk during COVID-19, and then, fits the corn spot and futures yield fluctuations based on the DCC-GARCH model, which highlights the model’s advantages for portraying the corn spot and futures price fluctuations during COVID-19. Subsequently, the dynamically optimal hedging ratio is solved from the perspective of behavioral hedging by combining the loss aversion (LA) utility function. Finally, the LA-DCC-GARCH model is compared with the Minimum variance (MV)-DCC-GARCH model in terms of hedging performance, which highlights the conclusion that the behavioral hedging strategy significantly outperforms the traditional hedging strategy.

The objective of this paper is to theoretically and empirically identify the effects of hedging and systematic fluctuation on banking stability in China. First, theoretical propositions indicate that the impact of credit derivative hedging and systematic fluctuation on banking stability in China is derived on the basis of a newly established theoretical model. Then, empirical research based on one-stage and two-stage GMM methods suggests that ascending hedging degrees leads to a linearly improving condition for banking stability with respect to overnight lending swap hedging, an improving-then-worsening condition for compensation swaps and an improving–worsening–improving condition for deposit swap hedging; at the same time, the ascending level of systematic fluctuation associated with hedging improves banking stability. Moreover, the trade-off between loan expansion and the stability maintenance of banking sectors can be managed by hedging compensation swaps and overnight lending swaps. In general, the empirical results support the applicability of the theoretical model, and the hedging of certain swaps can be used as a tool for stability maintenance purposes.

Alternative approaches to hedging swaptions are explored and tested by simulation. Hedging methods implied by the Black swaption formula are compared with a lognormal forward LIBOR model approach encompassing all the relevant forward rates. The simulation is undertaken within the LIBOR model framework for a range of swaptions and volatility structures. Despite incompatibilities with the model assumptions, the Black method performs equally well as the LIBOR method, yielding very similar distributions for the hedging profit and loss — even at high rehedging frequencies. This result demonstrates the robustness of the Black hedging technique and implies that — being simpler and generally better understood by financial practitioners — it would be the preferred method in practice.

We provide a new way of hedging a commodity exposure which eliminates downside risk without sacrificing upside potential. The tool used is a variant on the equity passport option and can be used with both futures and forwards contracts as the underlying hedge instrument. Results are given for popular commodity price models such as Gibson-Schwartz and Black with convenience yield. Two different scenarios are considered, one where the producer places his usual hedge and undertakes additional trading, and the other where the usual hedge is not held. In addition, a comparison result is derived showing that one scenario is always more expensive than the other. The cost of these methods are compared to buying a put option on the commodity.

We consider the problem of option pricing and hedging when stock returns are correlated in time. Within a quadratic-risk minimisation scheme with history-dependent hedging strategies, we obtain a general formula, valid for weakly correlated non-Gaussian processes. We show that for Gaussian price increments, the correlations are irrelevant, and the Black-Scholes formula holds with the volatility of the price increments calculated on the scale of the re-hedging. For non-Gaussian processes, further non trivial corrections to the "smile" are brought about by the correlations, even when the hedge is the Black-Scholes Δ-hedge. We introduce a compact notation which eases the computations and could be of use to deal with more complicated models.

We hereby present an explicit formula for European options on coupon bearing bonds in the Heath–Jarrow–Morton one factor model with non-stochastic volatility. The formula extends the Jamshidian formula for zero-coupon bonds for special form of volatility. Moreover we present a formula for zero-coupon bonds without condition on the volatility. We provide also an explicit way to compute the hedging ratio (Δ) in order to hedge the options individually.

A quantum field theory generalization, Baaquie [1], of the Heath, Jarrow and Morton (HJM) [10] term structure model parsimoniously describes the evolution of imperfectly correlated forward rates. Field theory also offers powerful computational tools to compute path integrals which naturally arise from all forward rate models. Specifically, incorporating field theory into the term structure facilitates hedge parameters that reduce to their finite factor HJM counterparts under special correlation structures. Although investors are unable to perfectly hedge against an infinite number of term structure perturbations in a field theory model, empirical evidence using market data reveals the effectiveness of a low dimensional hedge portfolio.

In this paper we consider the evaluation of sensitivities of options on spots and forward contracts in commodity and energy markets. We derive different expressions for these sensitivities, based on techniques from the recently introduced Malliavin approach [8, 9]. The Malliavin approach provides representations of the sensitivities in terms of expectations of the payoff and a random variable only depending on the underlying dynamics. We apply Monte–Carlo methods to evaluate such expectations, and to compare with numerical differentiation. We propose to use a refined quasi Monte–Carlo method based on adaptive techniques to reduce variance. Our approach gives a significant improvement of convergence.

A new approach to the problem of computing risk sensitivities of Bermuda swaptions in a lattice, or PDE, framework is presented. The algorithms developed perform the task much faster and more accurately that the traditional approach in which the Greeks are computed numerically by shocking the appropriate inputs and revaluing the instrument. The time needed to execute the tradition scheme grows linearly with the number of Greeks required, whereas our approach computes any number of Greeks for a Bermuda swaption in nearly constant time. The new method explores symmetries in the structure of Bermuda swaptions to derive recursive relations between different Greeks, and is essentially model-independent. These recursive relations allow us to represent risk sensitivities in a number of ways, in particular as integrals over the "survival" density. The survival density is obtained as a solution to a forward Kolmogorov equation. This representation is the basis for practical applications of our approach.

We consider a model of the economy that splits investors into two groups. One group (the reference traders) trades an underlying asset according to the difference in realized returns between that asset and some evolving consensus estimate of those returns; the other group (hedgers) hedge options, namely straddles, on the underlying asset. We consider the cases when hedgers are long the straddle and when the hedgers are short the straddle. We numerically simulate the terminal distribution of the underlying asset price and find that hedgers that are long the straddle tend to push the underlying toward the strike, while hedgers that are short the straddle cause the underlying security to have a bimodal terminal probability distribution with a local minimum at the strike.

In this paper we focus on the performance of volatility options as hedging instruments for hedging volatility risk. We investigate (a) the relative hedging performance of volatility and European options, (b) the relative hedging performance of volatility index and straddle options, and (c) the impact of model misspecification on hedging effectiveness. Our focus is on exotic options as the options to be hedged, because they are more sensitive to volatility risk and model risk and practically more relevant when the effectiveness of different hedging strategies is examined. Using a Monte Carlo simulation, we find that volatility options are especially useful for hedging options with a severe exotic feature and there is no significant difference between the performances of volatility index and straddle options. Furthermore, our results indicate that model misspecification has an important impact on the hedging performance.

We hedge options on electricity spot prices by cross hedging, i.e., by using another financial asset. We calculate hedging strategies by quadratic minimization and local risk minimization. In our model of energy markets, we have done a deep study of no arbitrage and of the existence of martingale measures with square integrable density. Then we have established tools for efficient hedges. Nevertheless, we have clearly proved possible limitations of the expiry of options with quadratic criteria.

This paper deals with the problem of determining the correct risk measure for options in a Black–Scholes (BS) framework when time is discrete. For the purposes of hedging or testing simple asset pricing relationships previous papers used the "local", i.e., the continuous-time, BS beta as the measure of option risk even over discrete time intervals. We derive a closed-form solution for option betas over discrete return periods where we distinguish between "covariance betas" and "asset pricing betas". Both types of betas involve only simple Black–Scholes option prices and are thus easy to compute. However, the theoretical properties of these discrete betas are fundamentally different from those of local betas. We also analyze the impact of the return interval on two performance measures, the Sharpe ratio and the Treynor measure. The dependence of both measures on the return interval is economically significant, especially for OTM options.

In this paper, we will explain how to perfectly hedge under Heston's stochastic volatility model with jump-to-default, which is in itself a generalization of the Merton jump-to-default model and a special case of the Heston model with jumps. The hedging instruments we use to build the hedge will be as usual the stock and the bond, but also the Variance Swap (VS) and a Credit Default Swap (CDS). These instruments are very natural choices in this setting as the VS hedges against changes in the instantaneous variance rate, while the CDS protects against the occurrence of the default event.

First, we explain how to perfectly hedge a power payoff under the Heston model with jump-to-default. These theoretical payoffs play an important role later on in the hedging of payoffs which are more liquid in practice such as vanilla options. After showing how to hedge the power payoffs, we show how to hedge newly introduced Gamma payoffs and Dirac payoffs, before turning to the hedge for the vanillas. The approach is inspired by the Post–Widder formula for real inversion of Laplace transforms. Finally, we will also show how power payoffs can readily be used to approximate any payoff only depending on the value of the underlier at maturity. Here, the theory of orthogonal polynomials comes into play and the technique is illustrated by replicating the payoff of a vanilla call option.

We consider reduced-form models for portfolio credit risk with interacting default intensities. In this class of models default intensities are modeled as functions of time and of the default state of the entire portfolio, so that phenomena such as default contagion or counterparty risk can be modeled explicitly. In the present paper this class of models is analyzed by Markov process techniques. We study in detail the pricing and the hedging of portfolio-related credit derivatives such as basket default swaps and collaterized debt obligations (CDOs) and discuss the calibration to market data.

We consider the problem of utility indifference pricing of a put option written on a non-tradeable asset, where we can hedge in a correlated asset. The dynamics are assumed to be a two-dimensional geometric Brownian motion, and we suppose that the issuer of the option have exponential risk preferences. We prove that the indifference price dynamics is a martingale with respect to an equivalent martingale measure (EMM) Q after discounting, implying that it is arbitrage-free. Moreover, we provide a representation of the residual risk remaining after using the optimal utility-based trading strategy as the hedge.

Our motivation for this study comes from pricing interest-rate guarantees, which are products usually offered by companies managing pension funds. In certain market situations the life company cannot hedge perfectly the guarantee, and needs to resort to sub-optimal replication strategies. We argue that utility indifference pricing is a suitable method for analysing such cases.

We provide some numerical examples giving insight into how the prices depend on the correlation between the tradeable and non-tradeable asset, and we demonstrate that negative correlation is advantageous, in the sense that the hedging costs become less than with positive correlation, and that the residual risk has lower volatility. Thus, if the insurance company can hedge in assets negatively correlated with the pension fund, they may offer cheaper prices with lower Value-at-Risk measures on the residual risk.

This paper provides a comparison of the exponential copula Lévy model with the classical Gaussian copula model for the pricing of CDO-squared tranches. Several approximations of the recursive approach are considered: a full Monte Carlo approximation, a multivariate Normal approximation of the joint inner CDO loss distribution and a multivariate Poisson approximation of the joint number of defaults affecting the inner CDOs. More particularly, a sensitivity analysis is carried out for three particular days characterized by a low, medium and high value of the quoted iTraxx and CDX index spreads. Moreover, this paper features a comparison of the exponential Lévy and Gaussian Deltas under the multivariate Normal approximation for a period extended from 20 September 2007 until 13 February 2008. The Deltas are computed with respect to a weighted and unweighted version of the CDS pool as well as with respect to another CDO-squared tranche.

The paper provides simple and rigorous, albeit fairly general, derivations of valuation formulae for credit default swaptions and credit default index swaptions. Results of this work cover as special cases the pricing formulae derived previously by Jamshidian [Finance and Stochastics8 (2004) 343–371], Pedersen [Quantitative Credit Research (2003)], Brigo and Morini (2005), and Morini and Brigo (2007). Most results presented in this work are completely independent of a particular convention regarding the specification of the fee and protection legs and thus they can also be used for valuation of other credit derivatives that exhibit similar features (for instance, options on CDO tranches). The main tools are a judicious choice of the reference filtration and a suitable specification of the risk-neutral dynamics for the pre-default (loss-adjusted) fair market spread.