Hedging the black swan: Conditional heteroskedasticity and tail dependence in S&P500 and VIX

Journal of Banking and Finance

Volumn 35, Issue 9, 2011, Pages 2374-2387

  Hilal, Sawsan ^a   Poon, Ser Huang ^b   Tawn, Jonathan ^c  

^a UNIVERSITY OF BAHRAIN   (Bahrain)

^b UNIVERSITY OF MANCHESTER   (United Kingdom)

^c LANCASTER UNIVERSITY   (United Kingdom)

Author keywords

Downside risk; Extremal dependence structure; Extreme value theory; Financial time series; Optimal hedge ratio

Indexed keywords

EID: 79960161743     PISSN: 03784266     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.jbankfin.2011.01.035     Document Type: Article

References (39)

1. Aloui R., Ben Aïssa M.S., Nguyen D.K. Global financial crisis, extreme interdependences, and contagion effects: the role of economic structure?. Journal of Banking and Finance 2011, 35(1):130-141.
2. Beine M., Cosma A., Vermeulen R. The dark side of global integration: increasing tail dependence. Journal of Banking and Finance 2010, 34(1):184-192.
3. Black K.H. Improving hedge fund risk exposures by hedging equity market volatility, or how the VIX ate my kurtosis. Journal of Trading 2006, 1(2):6-15.
4. Bowler, Ebens, B., Davi, H., Kolanovic, J., December 2003. Volatility - the perfect asset? Working paper, Merill Lynch Global Securities Research and Economics Group.
5. Castelino M.G., Francis J.C. Basis speculation in commodity futures: the maturity effect. Journal of Futures Markets 1982, 2:195-206.
6. Chen S.-S., Lee C.-F., Shrestha K. Futures hedge ratios: a review. Quarterly Review of Economics and Finance 2003, 43:433-465.
7. Choulakian V., Stephens M.A. Goodness-of-fit tests for the generalized Pareto distribution. Technometrics 2001, 43(4):478-484.
8. Coles S. An Introduction to Statistical Modelling of Extreme Values 2001, Springer-Verlag, London.
9. Coles S.G., Tawn J.A. Modelling extreme multivariate events. Journal of the Royal Statistical Society Series B 1991, 53:377-392.
10. Connors L. A volatile idea. Futures 1999, (July):36-37.
11. Cont R. Empirical properties of asset returns: stylized facts and statistical issues. Quantitative Finance 2001, 1:223-236.
12. Crowder M.J. On repeated measures analysis with misspecified covariance structure. Journal of the Royal Statistical Society Series B 2001, 63:55-62.
13. Daal E., Farhat J., Wei P. Does futures exhibit maturity effect? New evidence from an extensive set of US and foreign futures contracts. Review of Financial Economics 2006, 15(2):113-128.
14. Davison A.C., Smith R.L. Models for exceedances over high thresholds (with discussion). Journal of the Royal Statistical Society Series B 1990, 52:393-442.
15. Duan J.-C., Yeh C.-Y. Jump and volatility risk premiums implied by VIX. Journal of Economic Dynamics and Control 2010, 34(11):2232-2244.
16. Ederington L.H. The hedging performance of new futures markets. Journal of Finance 1979, 34:157-170.
17. Embrechts P., McNeil A., Straumann D. Correlation: pitfalls and alternatives. Risk 1999, 12:69-71.
18. Embrechts P., Lindskog F., McNeil A. Modelling dependence with copulas and applications to risk management. Handbook of Heavy Tailed Distributions in Finance 2003, 329-384. Elsevier Science B.V., North-Holland, Amsterdam, (Chapter 8). S.T. Rachev (Ed.).
19. Galloway T.M., Kolb R.W. Futures prices and the maturity effect. Journal of Futures Markets 1996, 7:809-828.
20. Grammatikos T., Saunders A. Futures price variability: a test of maturity and volume effects. Journal of Business 1986, 59:319-330.
21. Hartmann P., Straetmans S., de Vries C.G. Asset market linkages in crisis periods. Review of Economics and Statistics 2004, 86(1):313-326.
22. Heffernan J.E., Tawn J.A. A conditional approach for multivariate extremes. Journal of the Royal Statistical Society Series B 2004, 66(3):497-546.
23. Hyung N., de Vries C.G. Portfolio selection with heavy tails. Journal of Empirical Finance 2007, 14:383-400.
24. Ledford A.W., Tawn J.A. Statistics for near independence in multivariate extreme values. Biometrika 1996, 83:169-187.
25. Lien D., Tse Y.K. Hedging time-varying downside risk. Journal of Futures Markets 1998, 18(6):705-722.
26. Lien D., Tse Y.K. Hedging downside risk with futures contracts. Applied Financial Economics 2000, 10:163-170.
27. Lin Y.-N., Chang C.-H. Consistent modeling of S&P500 and VIX derivatives. Journal of Economic Dynamics and Control. 2010, 34(11):2302-2319.
28. Moran M.T. Review of the VIX index and VIX futures. Journal of Indexes 2004, 16-19.
29. Moran M.T., Dash S. VIX futures and options: pricing and using volatility products to manage downside risk and improve efficiency in equity portfolios. Journal of Trading 2007, 2(3):96-105.
30. Poon S.-H., Rockinger M., Tawn J. Extreme-value dependence in financial markets: diagnostics, models and financial implications. Review of Financial Studies 2004, 17:581-610.
31. Ripple R.D., Moosa I.A. Hedging effectiveness and futures contract maturity: the case of NYMEX crude oil futures. Applied Financial Economics 2007, 17(9):683-689.
32. Rockafellar R.T., Uryasev S. Optimization of conditional value-at-risk. Journal of Risk 2000, 2:21-41.
33. Samuelson P.A. Proof that properly anticipated prices fluctuate randomly. Industrial Management Review 1965, 6:41-49.
34. Sibuya M. Bivariate extreme statistics. Annals of the Institute of Statistical Mathematics 1960, 11:195-210.
35. Sklar A. Fonctions dé repartition á n dimensions et leurs marges. Publications de l'Institut de Statistique de L'Université de Paris 1959, 8:229-231.
36. Stork P.A., Pais A. Contagion risk in the Australian banking and property sectors. Journal of Banking and Finance. 2011, 35(3):681-697.
37. Sutcliffe C.M.S. Stock Index Futures: Theories and International Evidence 1993, Chapman and Hall.
38. Wang J.-N., Yeh J.-H., Cheng N.Y.-P. How accurate is the square-root-of-time rule at scaling tail risk: A global study. Journal of Banking and Finance 2011, 35:1158-1169.
39. Whaley R.E. Hedging tools long overdue. Journal of Derivatives 1993, 1(1):71-84.