Workshop "Modeling and Managing Risk"
Speakers
Abstract
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| Program | ||||||||||||||||
| Chairperson: Domenico Sartore (University of Venice and GRETA) | ||||||||||||||||
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| Participation in the workshop is free. Please register by sending an e-mail to Elli Hoek van Dijke (hoekvandijke@few.eur.nl) before Friday November 16. | ||||||||||||||||
“Equity option-factors in hedge fund returns” | ||||||||||||||||
Andre Lucas (Vrije Universiteit Amsterdam), Arjen Siegmann (Tinbergen Institute Amsterdam), and Marno Verbeek (RSM Erasmus University). | ||||||||||||||||
| Previous studies have shown that systematic risk in hedge fund returns is partly captured by short positions in put option returns. This is suggestive of a potential ‘peso problem’ in hedge fund returns: a series of steady returns may alternate with an occasional crash. In this paper, we scrutinize the robustness of this empirical finding. In contrast with earlier papers, we find significant loadings on both short-put and long-call option-factors. Moreover, we cast doubt on the temporal stability of short-put returns as a systematic risk factor before and after the market crash of the early 2000s. We also try to identify cross-sectional determinants of short-put type payoffs in hedge fund returns using the TASS/Tremont database sorted on performance, size, age, and flow.Our results again reveal that systematic long-call exposures prevail much more than short-put patters, both before and after the burst of the dot-com bubble. Our findings as a whole suggest that earlier conjectured concave patterns in hedge fund returns are restricted to specific hedge fund strategies and specific time periods. The concave patterns do not appear to hold for the industry as a whole. | ||||||||||||||||
“Using Duration Times Spread to Forecast Credit Risk” | ||||||||||||||||
| Arik Ben Dor (Lehman Brothers), Lev Dynkin (Lehman Brothers), Jay Hyman (Lehman Brothers), Patrick Houweling (Robeco Asset Management), Erik van Leeuwen (Robeco Asset Management), Olaf Penninga (Robeco Asset Management). | ||||||||||||||||
| Duration Times Spread (DTS) is a new measure of spread exposure for corporate bond portfolios. It is based on a detailed analysis of credit spread behavior. Changes in spreads are not parallel but rather linearly proportional to the level of spread, in that bonds trading at wider spreads experience greater spread changes. Consequently, systematic spread volatility of a sector is proportional to its spread; similarly, the idiosyncratic spread volatility of a particular bond or issuer is proportional to its spread, whatever the sector, maturity, or time period. Tests confirm that the behavior of spreads makes excess return volatility proportional to DTS. DTS has advantages over measures commonly used (such as spread duration) to forecast excess return volatility or construct portfolios, affecting the formulation of investment constraints, asset allocation, risk modeling, and performance attribution. | ||||||||||||||||
| “How Big is the Role of Real Estate in Securitized Portfolios? Assessing the Ex-Post Performance under Predictability and Parameter Uncertainty” | ||||||||||||||||
| Carolina Fugazza (CERP-CCA and University of Turin), Massimo Guidolin (Federal Reserve Bank of St Louis and Manchester Business School), Giovanna Nicodano (CERP-CCA and University of Turin). | ||||||||||||||||
| We calculate the ex-post, realized portfolio performance for an investor who diversifies among U.S. stocks, bonds, real estate indirect investment vehicles (E-REITS), and cash. Simulations are performed for two alternative asset allocation frameworks – classical and Bayesian - and for scenarios involving two different samples and six different investment horizons. Interestingly, the ex-post welfare cost of restricting portfolio choice to traditional financial assets (i.e., stocks, bonds, and cash) only is found to be positive in all scenarios for a Bayesian investor. On the contrary, substitution of E-REITS for stocks in optimal portfolios turns out to reduce ex-post portfolio performance over the nineties and for a Classical investor who ignores parameter estimation uncertainty. | ||||||||||||||||
“Dynamic Risk Exposure in Hedge Funds” | ||||||||||||||||
| Monica Billio (University of Venice and GRETA), Mila Getmansky (Isenberg School of Management, University of Massachusetts), Loriana Pellizon (University of Venice and GRETA). | ||||||||||||||||
| We measure dynamic risk exposure of hedge funds to various risk factors during different market volatility conditions using the regime-switching beta model. We find that in the high-volatility regime (when the market is rolling-down) most of the strategies are negatively and significantly exposed to the Large-Small and Credit Spread risk factors. This suggests that liquidity risk and credit risk are potentially common factors for different hedge fund strategies in the down-state of the market, when volatility is high and returns are very low. We further explore the possibility that all hedge fund strategies exhibit idiosyncratic risk in a high volatility regime and find that the joint probability jumps from approximately 0% to almost 100% only during the Long-Term Capital Management (LTCM) crisis. Out-of-sample forecasting tests confirm the economic importance of accounting for the presence of market volatility regimes in determining hedge funds risk exposure. | ||||||||||||||||
| Contact information: | ||||||||||||||||
| Elli Hoek van Dijke | ||||||||||||||||
