Extreme Returns without News: The Case of Currencies

2009 ◽  
Author(s):  
Tanseli Savaser ◽  
Carol L. Osler
Keyword(s):  
Extreme Returns

The Impact of Volatility Targeting

2018 ◽  
Keyword(s):  
Sharpe Ratio ◽  
Leverage Effect ◽  
Left Tail ◽  
Risk Parity ◽  
Asset Classes ◽  
Equity Portfolios ◽  
Sharpe Ratios ◽  
Tail Events ◽  
The Impact ◽  
Extreme Returns

Recent studies show that volatility-managed equity portfolios realize higher Sharpe ratios than portfolios with a constant notional exposure. The authors show that this result only holds for risk assets, such as equity and credit, and they link this finding to the so-called leverage effect for those assets. In contrast, for bonds, currencies, and commodities, the impact of volatility targeting on the Sharpe ratio is negligible. However, the impact of volatility targeting goes beyond the Sharpe ratio: It reduces the likelihood of extreme returns across all asset classes. Particularly relevant for investors, left-tail events tend to be less severe because they typically occur at times of elevated volatility, when a target-volatility portfolio has a relatively small notional exposure. We also consider the popular 60–40 equity–bond balanced portfolio and an equity–bond–credit–commodity risk parity portfolio. Volatility scaling at both the asset and portfolio level improves Sharpe ratios and reduces the likelihood of tail events.

scholarly journals Extreme Returns in the European Financial Crisis

2014 ◽  
Author(s):  
Andreas S. Chouliaras ◽  
Theoharry Grammatikos
Keyword(s):  
Financial Crisis ◽  
Extreme Returns

Volatility measures as predictors of extreme returns

2017 ◽  
Vol 35 ◽  
pp. 1-10 ◽  
Author(s):  
Lorne N. Switzer ◽  
Cagdas Tahaoglu ◽  
Yun Zhao
Keyword(s):  
Extreme Returns

Salience and Mutual Fund Investor Demand for Idiosyncratic Volatility

2020 ◽  
Author(s):  
Christopher P. Clifford ◽  
Jon A. Fulkerson ◽  
Russell Jame ◽  
Bradford D. Jordan
Keyword(s):  
Experimental Evidence ◽  
Mutual Funds ◽  
Mutual Fund ◽  
Idiosyncratic Volatility ◽  
Investor Attention ◽  
Risk Seeking ◽  
Retail Investors ◽  
Seeking Behavior ◽  
Extreme Returns

We find that mutual fund investors are more likely to both purchase and redeem funds with high idiosyncratic volatility (IV). Investors’ tendency to purchase high IV funds is largely driven by high IV funds having more extreme returns, which increases the salience of the fund. Including flexible controls for extreme past returns over multiple horizons decreases the effect of IV on new investment, and experimental evidence corroborates that increasing the salience of extreme returns increases investor demand for IV. Demand for IV is higher among retail investors and funds with otherwise lower salience. Collectively, the evidence suggests that extreme returns attract investor attention and contribute to investors’ risk seeking behavior when purchasing mutual funds. This paper was accepted by David Simchi-Levi, finance.

Stock market stress from the central counterparty’s perspective

2019 ◽  
Vol 36 (1) ◽  
pp. 51-62
Author(s):  
Barbara Dömötör ◽  
Kata Váradi
Keyword(s):  
Risk Management ◽  
Stock Market ◽  
Stress Measurement ◽  
Risk Measure ◽  
Moving Averages ◽  
Stress Indicators ◽  
Content Type ◽  
Stress Signals ◽  
Relative Spread ◽  
Extreme Returns

Purpose The purpose of this paper is to investigate the possibility of monitoring stress on stock markets from the perspective of a central counterparty (CCP). Due to their balanced positions, CCPs are exposed to extreme price movements in both directions; thus, the major risk for them derives from extreme returns and market illiquidity. The authors examined the connection of the stress alarms of return- and liquidity-based measures to find an objective basis for stress measurement. Design/methodology/approach The authors defined two types of stress measures: indicators based on extreme returns and liquidity. It is suggested that the stress indicators should be based on the existing risk management methodology that examines different risk measure oversteps. The stress signals of the past nine years on the German stock market were analyzed. The authors investigated the connection between the chosen stress measures to obtain a robust measure for alarming stress. Findings Although extreme returns and illiquidity are both characteristics of stress, the correlation of returns- and liquidity-based stress indicators is low when taking daily values. On the other hand, the moving averages of the indicators correlate significantly in the case of measures of downward and upward extreme returns and liquidity measured by the relative spread. The results are robust enough to be used for monitoring stress periods. Originality/value This paper contributes to understanding the characteristics of stress periods and points to the fact that stress signals measured by different aspects can also differ within the same asset class. The moving averages of returns- and relative spread-based indicators, however, could provide a cost-effective quantitative support for the risk management of a CCP and make the margin calculation predictable for clearing members as well.

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