A portfolio approach to risk reduction in discretely rebalanced option hedges
Article Abstract:
The risks arising from accumulated hedging errors generated by discretely rebalanced option hedges over different rebalancing intervals were examined. Specifically, an approach that combines options into portfolios was proposed for significantly reducing the risk of option arbitrage caused by hedging errors. The risk in arbitrage strategies suggested by the Black-Scholes option pricing method is represented by the variance of the accumulated hedging errors up to maturity. Empirical results showed that the hedging errors arising from the different options written on the same instrument are highly correlated, particularly for options whose moneyness is close. This finding suggests that the risk of arbitrage can be substantially reduced by combining options into portfolios.
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1998
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The effects of the sample size, the investment horizon and market conditions on the validity of composite performance measures: a generalization
Article Abstract:
Existing studies have demonstrated that the Sharpe measure and its risk proxy can be determined by sample size, the investment horizon, and market conditions. These conclusions can be generalized to incorporate the performance measures of Treynor and Jenson. It has also been established that estimates of ex-ante Treynor's measures are biased, actually creating biased ranking, and a possible bias linked to the cumulative average residual technique used in market testing may be produced by the relationship between the estimated Jenson's measure and its estimated risk measure. Also discussed are the indications of Friend's and Blume's positive empirical relationships.
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1986
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