This paper investigates the frequency of extreme events for three LIFFE futures contracts for the calculation of minimum capital risk requirements (MCRRs). We propose a semi-parametric approach where the tails are modelled by the Generalised Pareto Distribution and smaller risks are captured by...

The aim of this paper is to determine whether forward-looking option- implied returns forecasts lead to better out-of-sample portfolio performance than conventional time series models. We consider a simple two-asset setting with a risk-free asset and the S&P 500 index the risky asset with...

A price process is scale-invariant if and only if the returns distribution is independent of the price level. We show that scale invariance preserves the homogeneity of a pay-off function throughout the life of the claim and hence prove that standard price hedge ratios for a wide class of...

Many popular techniques for determining a securities firm’s value at risk are based upon the calculation of the historical volatility of returns to the assets that comprise the portfolio, and of the correlations between them. One such approach is the J.P. Morgan RiskMetrics methodology using...

The price of a European option can be computed as the expected value of the payoff function under the risk-neutral measure. For American options and path-dependent options in general, this principle can not be applied. In this paper, we derive a model-free analytical formula for the implied...

The article examines whether commodity risk is priced in the cross-section of equity returns. Alongside a long-only equally-weighted portfolio of commodity futures, we employ as an alternative commodity risk factor a term structure portfolio that captures the propensity of commodity futures...

The majority of risk adjusted performance measures (RAPM) currently in use – e.g., Treynor ratio, (?/?)) ratio, Omega index, RoVaR, ‘coherent’ preference criteria, etc. – are incompat- ible with any sensible utility function and would be best avoided. We argue instead for the assessment...

The study examines the existence of liquidity risk premia on freight derivatives returns. The Amihud liquidity ratio and bid-ask spreads are utilized to assess the existence of liquidity premia. Other macroeconomic variables are used to control for market risk. Results indicate that liquidity...

This paper provides and empirical examination of four European equity indices between 1991 and 2005. We investigate the ability of fifteen different GARCH models to capture the characteristics of historical daily returns effectively and generate realistic implied volatility skews. Using many...

This study proposes a utility-based framework for the determination of optimal hedge ratios that can allow for the impact of higher moments on the hedging decision. The approach is applied to a set of 20 commodities that are hedged with futures contracts. We find that in sample, the performance...