Tail Risk Hedging and Regime Switching


Huggenberger, Markus ; Albrecht, Peter ; Pekelis, Alexandr


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URL: https://ub-madoc.bib.uni-mannheim.de/38221
URN: urn:nbn:de:bsz:180-madoc-382217
Document Type: Working paper
Year of publication: 2015
The title of a journal, publication series: Mannheimer Manuskripte zu Risikotheorie, Portfolio Management und Versicherungswirtschaft
Volume: 186
Place of publication: Mannheim
Edition: Version 2015
Publication language: English
Institution: Außerfakultäre Einrichtungen > Institut für Versicherungswissenschaft
Business School > ABWL, Risikotheorie, Portfolio Management u. Versicherungswissenschaft (Albrecht)
MADOC publication series: Lehrstuhl für ABWL, Risikotheorie, Portfolio Management und Versicherungswirtschaft (Albrecht) > Mannheimer Manuskripte zu Risikotheorie, Portfolio Management und Versicherungswirtschaft
Subject: 330 Economics
Keywords (English): Futures Hedging , Quantile Derivatives , Mixture Distributions , Elliptical Distributions , Value at Risk , Conditional Value at Risk
Abstract: In this paper, we analyze futures-based hedging strategies which minimize tail risk measured by Value-at-Risk (VaR) and Conditional-Value-at-Risk (CVaR). In par- ticular, we first deduce general characterizations of VaR- and CVaR-minimal hedging policies from results on quantile derivatives. We then derive first-order conditions for tail-risk-minimal hedging in mixture and regime-switching (RS) models. Using cross hedging examples, we show that CVaR-minimal hedging can noticeably deviate from standard minimum-variance hedging if the return data exhibit nonelliptical features. In our examples, we find an increase in hedging amounts if RS models identify a joint crash scenario and we confirm a reduction in tail risk using empirical and EVT-based risk estimators. These results imply that switching from minimum-variance to CVaR- minimal hedging can cut losses during financial crises and reduce capital requirements for institutional investors.

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Huggenberger, Markus ; Albrecht, Peter ; Pekelis, Alexandr (2015) Tail Risk Hedging and Regime Switching. Open Access Mannheimer Manuskripte zu Risikotheorie, Portfolio Management und Versicherungswirtschaft Mannheim 186 [Working paper]
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