Discussion Papers
The ICMA Centre is dedicated to high quality academic research in all financial markets, broadly defined. Well over 100 discussion papers are available to download (see menu on left).
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2012 Series
The (De)merits of Minimum-Variance Hedging: Application to the Crack Spread
Carol Alexander, Marcel Prokopczuk and Anannit Sumawong
2012-01
Abstract: We study the empirical performance of the classical minimum-variance hedging strategy, comparing several econometric models for estimating hedge ratios of crude oil, gasoline and heating oil crack spreads. Given the great variability and large jumps in both spot and futures prices, great care is required when processing the relevant data and accounting for the costs of maintaining and re-balancing the hedge position. We find that the variance reduction produced by all models are statistically and economically indistinguishable from the one-for-one "na ̈ıve" hedge. However, margin and transaction costs produced by GARCH-based models are excessive. Therefore we encourage hedgers to use a na ̈ıve hedging strategy on the crack spread bundles now offered by the exchange as it is the cheapest and easiest to implement. Our conclusion contradicts the majority of the existing literature, which favours the implementation of GARCH-based hedging strategies.
The interactive financial effects between corporate social responsibility and irresponsibility
Ioannis Oikonomou, Chris Brooks, Stephen Pavelin
2012-02
Abstract: Firms typically present a mixed picture of corporate social performance (CSP), with positive and negative indicators exhibited by the same firm. Thus, stakeholders’ judgements of corporate social responsibility (CSR) typically evaluate positives in the context of negatives, and vice versa. We present two alternative accounts of how stakeholders respond to such complexity, which provide differing implications for the financial effects of CSP: reciprocal dampening and rewarding uniformity. Our US panel study finds a U-shaped relationship – firms that exhibit solely positive or solely negative indicators outperform firms that exhibit both – which supports the notion that stakeholders’ judgements of CSR reward uniformity.
Risk Premia in Covered Bond Markets
Marcel Prokopczuk and Volker Vonhoff
2012-03
Abstract: In this paper, we empirically explore risk premia in mortgage covered bond markets. Using a large panel data set of covered bond asset swap spreads, we study the impact of different legal and economic environments. Conducting an in-depth analysis of this market, we find significant but small differences between countries during normal market periods. However, these differences are much stronger during times of economic crisis. Moreover, we find that developments in the real estate market are of relatively little importance during stable market periods. During economic distress, however, these have been of high importance for explaining risk premia in covered bond markets.
A General Approach to Real Option Valuation with Applications to Real Estate Investments
Carol Alexander and Xi Chen
2012-04
Abstract: We model investment opportunities with a single source of uncertainty, i.e. the market price of the investment. Investment cost can be predetermined or perfectly correlated with the market price. The common paradigm for risk-neutral real-option pricing is a special case en- compassed within our general framework, and we analyse the relationship between standard real option prices and the more general risk-averse real option values. Numerical examples illustrate how these general values depend on the frequency of decision opportunities, the investor's risk tolerance and its sensitivity to wealth, his expected return and volatility of the underlying asset, and the price of the asset relative to initial wealth. Specific applications to real estate include property investment under ‘boom-bust' or mean-reverting price scenarios, and buy-to-let or land-development opportunities.
Average Portfolio Insurance Strategies
Jacques Pézier and Johanna Scheller
2012-05
Abstract:We design average portfolio insurance (API) strategies with an investment floor and a buffer that is a power of a geometric average of the underlying asset price. We prove that API strategies are optimal for investors with hyperbolic absolute risk aversion who become progressively more risk averse over time. During the averaging period, API strategies reduce the proportion of wealth allocated to the risky asset, which is the traditional life cycle investment recommendation. We compare the sensitivities of the fair price of equivalent payoffs generated by average and constant proportion portfolio insurance strategies and illustrate the performance of API strategies.
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