This paper presents an empirical comparison of the out of sample hedging performance from naïve and minimum variance hedge ratios for the four largest US index exchange traded funds (ETFs). Efficient hedging is important to offset long and short positions on market maker's accounts,...

This paper examines, from a market efficiency perspective, the performance of a simple dynamic equity indexing strategy based on cointegration. A consistent 'abnormal' return in excess of the benchmark is demonstrated over different time horizons and in different real world and simulated stock...

Arbitrage-free price bounds for convertible bonds are obtained assuming equity-linked hazard rates, stochastic interest rates and different assumptions about default and recovery behavior. Uncertainty in volatility is modeled using a stochastic volatility process for the common stock that lies...

Most option pricing models assume all parameters except volatility are fixed; yet they almost invariably change on re‐calibration. This article explains how to capture the model risk that arises when parameters that are assumed constant have calibrated values that change over time and how to use...

Different theoretical and numerical methods for calculating the fair-value of a variance swap give rise to systematic biases that are most pronounced during volatile periods. For instance, differences of 10-20 percentage points would have been observed on fair-value index variance swap rates...

Most research on option hedging has compared the performance of delta hedges derived from different stochastic volatility models with Black-Scholes-Merton (BSM) deltas, and in particular with the `implied BSM’ model in which an option’s delta is based on its own market implied volatility....

It is widely accepted that some of the most accurate Value-at-Risk (VaR) estimates are based on an appropriately specified GARCH process. But when the forecast horizon is greater than the frequency of the GARCH model, such predictions have typically required time-consuming simulations of the...

The data generation process underlying regional house prices in the UK is investigated using new statistical tests. It is found that causal flows tend to be northwards: the South East (rather than Greater London) acts as an exogenous price determinator of the other regions in the south; the...

Random orthogonal matrix (ROM) simulation is a very fast procedure for generating multivariate random samples that always have exactly the same mean, covariance and Mardia multivariate skewness and kurtosis. This paper investigates how the properties of parametric, data-specific and...