The sovereign debt crisis challenged investors in European government bonds to deal with volatile interest rate spreads. For managing sovereign risk, “Eurex” introduced futures contracts on Italian government bonds reflecting risks of lower rated countries. We analyze hedging strategies for bond portfolios with futures on German and Italian government bonds before and during the sovereign debt ...

Basis = price of hedged asset-price of hedging instrument problem of basis risk: uncertainties of processes describing the evolution of prices of asset and hedging instrument not identical, only highly correlated Example 1: weather derivatives hedged asset: heating oil sales, hedging instrument: HDD derivative HDD derivative: contract paying a premium in case HDD above a critical threshold Exam...

Stock price crash risk is a phenomenon in which stock prices are subject to severe negative and sudden adjustments. So far, different approaches have been proposed to model and predict  the  stock price crash risk, which in most cases have been the main emphasis on the factors affecting it, and often traditional methods have been used for prediction. On the other hand, using  Meta Heuristic Alg...

The question of optimal portfolio is addressed. The conventional Markowitz portfolio optimisation is discussed and the shortcomings due to non-Gaussian security returns are outlined. A method is proposed to minimise the likelihood of extreme non-Gaussian drawdowns of the portfolio value. The theory is called leptokurtic, because it minimises the effects from ”fat tails” of returns. The leptokur...

Imagine there exist markets for yield futures contracts as well as ordinary price futures contracts. • Intuitively one would think that a combined use of yield futures contracts and price futures contracts ought to provide a reasonable strategy for insuring revenue. • In the paper this idea is made precise. It is shown that revenue can be secured in by a combined replication of these two contra...

This paper proposes an unobserved fundamental component of volatility as a measure of risk. This concept of fundamental volatility may be more meaningful than the usual measures of volatility for market regulators. Fundamental volatility can be obtained using a stochastic volatility model, which allows us to `®lterÕ out the signal in the volatility information. We decompose four FTSE100 stock i...

Research on the impact of the introduction of derivatives on the market volatility has reported mixed evidences. In this paper, we study the volatility implications of the introduction of derivatives on the stock market in India using S&P CNX IT index. To account for the heteroscedasticity in the time series, GARCH model is used. We find clustering and persistence of volatility in different deg...