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Seo, Byoung Ki
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Performance of Tail Hedged Portfolio with Third Moment Variation Swap

Author(s)
Lee, KyungsubSeo, Byoung Ki
Issued Date
2017-10
DOI
10.1007/s10614-016-9593-0
URI
https://scholarworks.unist.ac.kr/handle/201301/19964
Fulltext
http://link.springer.com/article/10.1007%2Fs10614-016-9593-0
Citation
COMPUTATIONAL ECONOMICS, v.50, no.30, pp.447 - 471
Abstract
The third moment variation of a financial asset return process is defined by the quadratic covariation between the return and square return processes. The skew and fat tail risk of an underlying asset can be hedged using a third moment variation swap under which a predetermined fixed leg and the floating leg of the realized third moment variation are exchanged. The probability density function of the hedged portfolio with the third moment variation swap was examined using a partial differential equation approach. An alternating direction implicit method was used for numerical analysis of the partial differential equation. Under the stochastic volatility and jump diffusion stochastic volatility models, the distributions of the hedged portfolio return are symmetric and have more Gaussian-like thin-tails.
Publisher
SPRINGER
ISSN
0927-7099
Keyword (Author)
Financial returnSkewnessFat tail risk hedgeMoment variation swapQuadratic variation method
Keyword
STOCHASTIC VOLATILITYREALIZED VOLATILITYHIGH-FREQUENCYMODELSVALUATIONEQUATIONSOPTIONSMARKETCONDITIONAL SKEWNESS

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