This paper analyzes optimal investment decisions, in the presence of non-redundant hedge funds, for investors with constant relative risk aversion. Factor regression models with optionlike risk factors and no-arbitrage principles are used to identify and estimate the market price of hedge fund risk, the volatility coefficients of hedge fund returns and the correlation between hedge fund and mar...

We explore optimal hedge ratios and hedging effectiveness for the German electricity market. Given the increasing attention that wavelets received in the financial market, we concentrate on the investigation of the relationship, covariance/coherence evolution and hedge ratio analysis, on a time-frequency-scale approach (discrete and continuous), between electricity spot and futures. Simpler app...

We study the economic importance of accounting information as defined by the value that sophisticated investors can extract from financial statements when maximizing their expected utility from holding a portfolio of U.S. equities. Our approach applies the elegant parametric portfolio policy (PPP) method of Brandt, Santa-Clara and Valkanov (2009) that models portfolio weights as a linear functi...

H igh price volatility and the risk are the main features of commodity markets. One way to reduce this risk is to apply the hedging policy by future contracts. In this regard, in this paper, we will calculate the optimal hedging ratios for OPEC oil. In this study, besides the multivariate GARCH models, for the first time we use conditional copula models for modelling dependence struc...

This study evaluates the efficiency of cross hedging with single stock futures (SSF) contracts. We propose a new technique for hedging exposure to an individual stock that does not have options or exchange-traded SSF contracts written on it. Our method selects as a hedging instrument a portfolio of SSF contracts which are selected based on how closely matched their underlying firm characteristi...

We investigate the optimal strategy over a finite time horizon for a portfolio of stock and bond and a derivative in an multiplicative Markovian market model with transaction costs (friction). The optimization problem is solved by a Hamilton-Bellman-Jacobi equation, which by the verification theorem has well-behaved solutions if certain conditions on a potential are satisfied. In the case at ha...

In view of the recent documented hedging bias attributable to failing to accommodate volatility long memory, we suggest to use the simple, yet superior, realized variancecovariance (RVCOV) in dynamic hedging. For its incremental value from intradaily information, model-free and inherent long memory, RVCOV has been shown to be accurate without misspecification bias and easily generalized to high...

This paper considers the optimal asset allocation problem for defined-contribution pension plan members whose terminal utility is a function of replacement ratio, i.e. the pension-to-final wage ratio. When three asset types are available for investment, the optimal portfolio composition, which is horizon dependent, includes investment in both riskless and risky assets. The investment in risky a...

Eling and Schuhmacher (2007) compared the Sharpe ratio with other performance measures and found virtually identical rank ordering using hedge fund data. They conclude that the choice of performance measure has no critical influence on fund evaluation and that the Sharpe ratio is generally adequate for analyzing hedge funds. Nevertheless, their analysis does not include the class of tailor-made...