A research was conducted by Ivan Matic and some of his research fellows on the PDE method for the process of estimation for implied volatility. The research contributed to identifying that the Black Scholes implied volatility contributes to satisfying the second order for the non-linear and partial differential equations. The identified PDE was utilized for the construction of an algorithm for accurate and fast polynomial approximation for the Black Scholes, which further got implied for the volatility, which contributed to improving the existing numerical schemes for the side of literature. Through the contribution of this literature, it was also identified that these schemes are taking place as both, which include parallelizability and speed as well. It was also shown through the contribution of literature that the intended method is applicable for some of the other problems as well, which include the approximation for the implied Bachelier volatility (Matic, 2019).
Emphasis was laid on the implied volatility sentiment by considering a tale of two tails. The research took place through the contribution of Luiz Felix as they propose a sentiment measure jointly which was derived from the out of the money index single stock calls through implied volatility (IV-) sentiment. When it comes to contrasting the implied correlations, it was assessed that their measure utilized the information and data from the tails of the densities, which were risk-neutral from two of the markets rather than the entire moneyness structures. Through the contribution of literature, it was identified that the IV-sentiment helps in measuring the value of the ad above and over the traditional factors in predicting the equity regarding the risk premium out of the samples (Felix, 2020).
. It was also found that the forecasting results are much superior when it comes to constraining the ensemble models, which are utilized as vis-à-vis techniques of the machine learning process. Through the contribution of the mean reversion strategy, it was assessed that the IV-sentiment is contributing to measuring the delivers economically, which is depicting some of the most significant and prestigious results with the limited exposure for the set of cross-sectional equity factors. These cross-sectional equity factors majorly included French and Fama’s five factors. The novel also contributed to measuring the reflection for the overweight of tail events, which got further interpreted as the behavioral bias. Somehow, it was also identified that they couldn’t rule a risk compensation rationale (Felix, 2020).
A research was conducted by D. Jeffrey et al (Fisher, 2019), for investigating the risk attribution analysis for the real estate portfolios. They were focused on comparing a fund or any of the performance of the portfolio for the benchmark, which usually involves the attribution analysis and risk analysis as well. The risk analysis contributes to measuring the Jensen’s alpha, and beta for determining of the portfolio is riskier when it comes to comparing with the benchmark. Through the contribution of attribution analysis, they decompose the spread among the benchmark and portfolio, which got returned to the components which were due for allocating the sector weights of the portfolio by selecting the individual assets diversely than the benchmarks. Two of these analyses were done independently and typically through the contribution of attribution analysis, significantly, assuming that there were no such differences in risk among the benchmark and portfolio (Fisher, 2019).
As per part of the result, it was identified that the allocation and selection would properly get implied for some factors, which refers to the nominal or simple alpha. The nominal and simple alpha is portraying the difference among the benchmark and portfolio return as well by ignoring some of the major risks. It was also assessed through the contribution of major findings that the risk-adjusted performance attribution can provide a quite diverse interpretation for which some of the sectors much contribute for the worse or better performance, which is relative to the benchmark as well. The traditional attribution analysis showed that a manager who is appearing for doing well in a sector could also portray a higher return, which is related to the benchmark, which was due to taking more risks. For a better understanding, it can be said that by utilizing a risk-adjusted return, it can result in a better understanding of some sectors, which contribute to over or underperformance (Fisher, 2019).
A research was conducted by on investigating the relative effect of operational hedging on the operating costs of airlines. Due to the most recent hedging losses, the fuel prices for the relative fuel were low for albeit prolonged volatility, which contributes to assessing the rising costs for the financial hedging as well. There were so many airlines who explicitly decided that they would scale back or forego to the financial jet fuel derivatives, and they would also try to manage the risk exposure through some of the strategies, which were also operational hedging. By considering the sample for 80 global airlines, it was evaluated that the cost impact regarding the operational hedging and its association with the financial hedging. The results contributed to showing the fact that operational hedging is completely based on the aircraft engine, which is helping commonality and significantly in reducing the operating costs (Swidan, 2019).
Besides, it does not work for the standalone strategy for managing the risk of jet fuel exposure. The empirical models which were used contributed to identifying that deploying operational hedging in the process of conjunction with some of the financial derivatives is much more efficient. They do not just contribute to reducing the unit cost, but instead, they also contribute to increasing profitability. These were some of the strengths and weaknesses which were assessed through the contribution of the intended literature. The researchers were keenly focused on the recent hedging losses, and that is the only reason they have researched depicting the ways which can be used for managing the intended risks appropriately (Swidan, 2019).
In 2019, a study was carried by Jie Cao, Yong Jin, Neil D Pearson, and Dragon Tang to know the effect of the 1st derivation to the 2nd derivation in the relative class of assets. They argue that there are trillions of derivatives that are trading in their relative markets on a regular basis, but there were less researches on the effect of these derivations on the other derivation. Summarizing, the research has said that there is the direct interaction of the derivatives of the same firm or the same market. The focus of the study was to examine the effect of credit derivatives on derivatives that are based on equity. The research has shown that the firms having equity options with credit default swaps are more expensive than non CDS firms. The research was based on the development of hypothesis and proving them right by means of calculations of equity and debts means of derivatives and integration (Cao, Jin, Pearson, & Tang, 2019 ).
The main results of the research were based on the delta-hedged option returns. The effect of CDS on the different options was robust to the various measure of a selection of pricing and sample period that was likely to be casual and stronger when dealers related to the funding costs are high. The results of the research were consistent with the vision related to the effect of derivative pricing is influenced by the market dealers, intermediation capacity, and the vision supports the intermediary pricing theory of the assets (Cao, Jin, Pearson, & Tang, 2019 ).
Colin Myers has carried his research with the point of view the knowing of effect on mergers in the different industries and the same of acquisitions on the long term volatility of returns based on equity. The objective of the research was to demonstrate the relationship between the theoretical diversifying the effect inter-industry merging and acquisition and changes in the volatility of firms that have been acquired, changes in publically traded security returns based on equity. Changes are to be measured in the standard deviation in the percentage change of prices. These changes are to measure from pre-transaction announcement to post transaction completion (Myers, 2019 ).
The hypothesis of the research was that there is a negative relationship between the changes in the returns of the equity of the firms over the time and completion of diversifying acquisition of the firm. The methodology that has been used in the research was based on the testing of the hypothesis. The data was collected in a base that 980 diversifying and 9256 nondiversifying mergers and acquisition transactions announced between January 1980 and June 2017. The result of the research has indicated that multiple regression is to be statistically significant. The multiple regressions also resulted that the most significant factors that affect the changes in equity returns of acquirer volatilities during the time period that surrounds the mergers and acquisition transaction are idiosyncratic (Myers, 2019 ).
The research was proposed by Maciej Augustyniak and his team in 2019 (Augustyniak, Godin, & Simard, 2019 ) that was based on the profitable modification to global quadratic hedging. The research has references the previous recent researches that have indicated the global quadratic hedging that is also known as optimal variance hedging and mean-variance hedging. It has been estimated that the global quadratic hedging can significantly reduce the risks related to the hedging call and options with the long term notes and maturities or equity. The research has proposed the modification of global hedging that is more profitable than the on average hedge without increasing the risks related to hedging. Mathematical techniques were used to carry out the research (Augustyniak, Godin, & Simard, 2019 ).
It has been proven that the estimated terminal gain based on the hedging of the modified method and strategy was larger than the global quadratic hedging strategy. The strategy that was proposed in the research was evaluated on the basis of simulated returned paths from regime-switching, GARCH and models related to jump-diffusion. Further, the performance was checked on the basis of S & P 500 return paths. The research has concluded that the modified systems and strategy that has been proposed in the research were more effective and profitable than global quadratic hedging (Augustyniak, Godin, & Simard, 2019 ).
John Y. Campbell, Stefano Giglio, Christopher Polk, and Robert Turley to demonstrate intertemporal CAPM with stochastic volatility. The research paper has described the risks related to the pricing of volatility using the condition that was based on the first order of equity of relative larger period, known as long term equity, investors which has the representation or content to hold and utilized re-aggregate equity of the market instead of enhancing the weighting of values of the stocks and shares and other portfolios related to them that can be attractive for the investors of the lower time period. The research has shown that the investor for a long period has avoided such overweight’s to hedge the different types of variation in the stock and other investment opportunities as well as expected reducing returns on the shares and to enhance volatility. The researcher has provided evidence that the low-frequency variations in the volatility of equity
A research was carried by Xue Dong He and Steven Kou in 2016 profit-sharing in hedges. The researchers have introduced the first loss scheme, a fund investment manager that has used their investment in the fund to cover any losses firsts and traditionally scheme in the funds of assets. The research has proposed the framework relative if cumulative aspects to compare and compute the strategies related to the trading. The reasonable parameter values were used were found to improve the utilities and fund risk management. It has been evaluated that by comparing with the US traditional scheme, the adjusted framework has improved 10% internal capital and 30% performance (He & Kou, 2016 ).
The method which has been used in intended research paper is Quantitative resrach which has contributed in gathering the relevant data regarding the topic. Numerous surveys were conducted in 10 organizations through which the resrachers gathered the information. Questionnaires were divided among each of the leaders of organizations and after collecting the results , it was assessed that the resasonble parameters are getting utilized for improving risk management very well. This methodology has provided a open ground as it permiteed for the broader study by involving a number of subjects which have enhances the generalization of the results. It also provided the greater accuracy and objectivity for the results. It has also supported the idea and hypothesis which were made at the fisrt place.
Limitations & Gaps
It has been executed through the contribution of literature, that volatility sentiment by considering a tale of two tails can’t rule a risk compensation rationale. It has been assessed that the IV-sentiment can contribute to measuring the delivers economically but with limited exposure, especially when it comes to the cross-sectional equity factors. It was also assessed that the Jensen alpha and beta for determining some of the major portfolios could be more risky, which can depict so many risks for comparing the intended benchmark as well. Another research has contributed to identifying some of the major gaps, which include the relative effect of operational hedging on the operating costs of airlines. It was highly assessed during this process of investigation; the standalone strategy would not work for managing the risks for jet fuel exposure (Swidan, 2019).
These are some of the identifications which have justified that there are some of the major gaps in the research. There are some of the ways which can contribute to managing the relative risks, but at the same time, it’s very difficult for implementing the standalone strategy as it does not work for the intended context. Another major gap has identified through the contribution of research, which states that if the risk-adjusted performance attribution provides a diverse interpretation, it can disturb the better performance of the relative benchmarks as well (Felix, 2020).
The weakness of the research was that it has focused on equity, debts and delta hedged options of returns. Assets related to derivation were missed. Further, other research questions that were based on the volatility of derivatives, indexing and positive alpha using CAPM. The research that was proposed by Colin Myers has demonstrated the equity volatilities that were based on mergers and acquisitions. It has not focused on mitigating and systematic derivatives, as well as risks related to the derivatives. Further, Options and indexes that can be used to improve the hedging and profitability of the firm were not discussed in the research paper. It has not indicated the portfolio related to the zero betas that will be positive by using the techniques of CAPM. The research has correctly described the volatiles in the equity of the firm of the inert market, but the factors that can affect the equity were limited to the mergers and acquisitions. Other factors like hedging, volatility etc. were not described in the research. So the factors that were described in ten research were limited to the factors of M & A.
The research has focused on global quadratic hedging that has been modified and improved profitability, but the research has not taken the factors VIC index to enhance profitability. Further, the financial derivatives were not taken into consideration. The research has not focused on the development of zero beta VIX portfolio with positive alpha. Further, there was no indication of the enhancement of profitability. It has not focused on the enhancement of profitability and reducing the risks in the process of hedging. Further, options in the asset class and portfolio requirements are not discussed in the study.
Augustyniak, M., Godin, F., & Simard, C. (2019 ). A profitable modification to global quadratic hedging. Journal of Economic Dynamics and Control.
Campbell, J. Y., Giglio, S., Polk, C., & Turley, R. (2018 ). An intertemporal CAPM with stochastic volatility. Journal of Financial Economics.
Cao, J., Jin, Y., Pearson, N. D., & Tang, D. Y. (2019 ). Does the Introduction of One Derivative Affect Another Derivative? The Effect of Credit Default Swaps Trading on Equity Options. The University of Illinois at Urbana-Champaign and Canadian Derivatives Institute.
Felix, L. (2020). Implied volatility sentiment: a tale of two tails. Quantitative Finance, 823-849.
Fisher, D. J. (2019). Risk-Adjusted Attribution Analysis of Real Estate Portfolios. The Journal of Portfolio Management, 80-94.
He, X. D., & Kou, S. (2016 ). PROFIT SHARING IN HEDGE FUNDS. Mathematical Finance.
Matic, I. (2019). A PDE method for estimation of implied volatility. Quantitative Finance, 393-408.
Myers, C. (2019 ). The Effects of Inter-Industry Mergers and Acquisitions on the Long-Term Volatility of Equity Returns. Marriott School of Management.
Swidan, H. (2019). The relative effect of operational hedging on airline operating costs. Transport Policy, 70-77.
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