Journal of International Financial Markets, Institutions and Money, Sep 1, 2021
We propose a novel bivariate component GARCH model that simultaneously obtains factor betas’ long... more We propose a novel bivariate component GARCH model that simultaneously obtains factor betas’ long- and short-run components. We apply the model to industry portfolios using market, small-minus-big, and high-minus-low portfolios as risk factors. We find that the cross-sectional average and dispersion of the betas’ short-run component increase in bad states of the economy. Our analysis shows that decomposing risk across horizons might help explain the anomaly that the market beta is typically not priced, as we find that the risk premium related to the short-run market beta is significantly positive. This is robust to portfolio choice.
This paper proposes a new risk factor based on a multi-country’s trading imbalance network to exp... more This paper proposes a new risk factor based on a multi-country’s trading imbalance network to explain foreign exchange rate fluctuations and currency risk premia associated with a currency carry trade strategy. We build a directed in-degree trading network of global countries linked by their pair wise trading deficit using import and export trading data collected from UN comtrade. After sorting currencies portfolios based on the centrality scores, the new risk factor, i.e., CMP, Central Minus Peripheral is created by buying central countries currency and shorting peripheral countries currency. We then use this factor to explain the risk premium of the foreign currency and currency excess returns cross sectional variations. Our results confirm the explanatory power of the new risk factor. We show that the new measure has signifcant explanatory power to currency risk premium and corsssectional foreign currency excess returns after controlling the existing risk factors of e.g., Lustig and Verdelhan (2011), Corte et al. (2016), and Richmond (2019).
In this paper, we test the market efficiency of the OMXS30 Index option market. The market effici... more In this paper, we test the market efficiency of the OMXS30 Index option market. The market efficiency definition is the absence of arbitrage opportunity in the market. We first check the arbitrage opportunity by examining the boundary conditions and the Put-Call-Parity that must be satisfied in the market. Then a variance based efficiency test is performed by establishing a risk neutral portfolio and re-balance the initial portfolio in different trading strategies. In order to choose the most appropriate model for option price and hedging strategies, we calibrate several most applied models, i.e. the BS, Merton, Heston, Bates model and Affine Jump Diffusion models. Our results indicate that the AJD model significantly outperforms other models in the option price forecast and the trading strategies. The boundary and the PCP test and the dynamic hedging strategy results evidence that no significant abnormal returns can be obtained in the OMXS30 option market, therefore supporting the ...
Journal of International Financial Markets, Institutions and Money, 2021
We propose a novel bivariate component GARCH model that simultaneously obtains factor betas’ long... more We propose a novel bivariate component GARCH model that simultaneously obtains factor betas’ long- and short-run components. We apply the model to industry portfolios using market, small-minus-big, and high-minus-low portfolios as risk factors. We find that the cross-sectional average and dispersion of the betas’ short-run component increase in bad states of the economy. Our analysis shows that decomposing risk across horizons might help explain the anomaly that the market beta is typically not priced, as we find that the risk premium related to the short-run market beta is significantly positive. This is robust to portfolio choice.
Journal of International Financial Markets, Institutions and Money, Sep 1, 2021
We propose a novel bivariate component GARCH model that simultaneously obtains factor betas’ long... more We propose a novel bivariate component GARCH model that simultaneously obtains factor betas’ long- and short-run components. We apply the model to industry portfolios using market, small-minus-big, and high-minus-low portfolios as risk factors. We find that the cross-sectional average and dispersion of the betas’ short-run component increase in bad states of the economy. Our analysis shows that decomposing risk across horizons might help explain the anomaly that the market beta is typically not priced, as we find that the risk premium related to the short-run market beta is significantly positive. This is robust to portfolio choice.
This paper proposes a new risk factor based on a multi-country’s trading imbalance network to exp... more This paper proposes a new risk factor based on a multi-country’s trading imbalance network to explain foreign exchange rate fluctuations and currency risk premia associated with a currency carry trade strategy. We build a directed in-degree trading network of global countries linked by their pair wise trading deficit using import and export trading data collected from UN comtrade. After sorting currencies portfolios based on the centrality scores, the new risk factor, i.e., CMP, Central Minus Peripheral is created by buying central countries currency and shorting peripheral countries currency. We then use this factor to explain the risk premium of the foreign currency and currency excess returns cross sectional variations. Our results confirm the explanatory power of the new risk factor. We show that the new measure has signifcant explanatory power to currency risk premium and corsssectional foreign currency excess returns after controlling the existing risk factors of e.g., Lustig and Verdelhan (2011), Corte et al. (2016), and Richmond (2019).
In this paper, we test the market efficiency of the OMXS30 Index option market. The market effici... more In this paper, we test the market efficiency of the OMXS30 Index option market. The market efficiency definition is the absence of arbitrage opportunity in the market. We first check the arbitrage opportunity by examining the boundary conditions and the Put-Call-Parity that must be satisfied in the market. Then a variance based efficiency test is performed by establishing a risk neutral portfolio and re-balance the initial portfolio in different trading strategies. In order to choose the most appropriate model for option price and hedging strategies, we calibrate several most applied models, i.e. the BS, Merton, Heston, Bates model and Affine Jump Diffusion models. Our results indicate that the AJD model significantly outperforms other models in the option price forecast and the trading strategies. The boundary and the PCP test and the dynamic hedging strategy results evidence that no significant abnormal returns can be obtained in the OMXS30 option market, therefore supporting the ...
Journal of International Financial Markets, Institutions and Money, 2021
We propose a novel bivariate component GARCH model that simultaneously obtains factor betas’ long... more We propose a novel bivariate component GARCH model that simultaneously obtains factor betas’ long- and short-run components. We apply the model to industry portfolios using market, small-minus-big, and high-minus-low portfolios as risk factors. We find that the cross-sectional average and dispersion of the betas’ short-run component increase in bad states of the economy. Our analysis shows that decomposing risk across horizons might help explain the anomaly that the market beta is typically not priced, as we find that the risk premium related to the short-run market beta is significantly positive. This is robust to portfolio choice.
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