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- Title
When to Hedge Downside Risk?
- Authors
Giannikos, Christos I.; Guirguis, Hany; Kakolyris, Andreas; Suen, Tin Shan
- Abstract
Hedging downside risk before substantial price corrections is vital for risk management and long-only active equity manager performance. This study proposes a novel methodology for crafting timing signals to hedge sectors' downside risk. These signals can be integrated into existing strategies simply by purchasing sector index put options. Our methodology generates successful signals for price corrections in 2000 (dot-com bubble) and 2008 (global financial crisis). A key innovation involves utilizing sector correlations. Major price swings within six months are signaled when a sector exhibits high valuation alongside abnormal correlations with others. Utilizing the price-to-earnings ratio for identifying sectors' high valuations is more beneficial than the bond–stock earnings yield differential. Our signals are also more efficient than those of standard technical analyses.
- Subjects
WAGE differentials; OPTIONS (Finance); GLOBAL Financial Crisis, 2008-2009; HEDGING (Finance); PRICES
- Publication
Risks, 2024, Vol 12, Issue 2, p42
- ISSN
2227-9091
- Publication type
Article
- DOI
10.3390/risks12020042