nep-fmk New Economics Papers
on Financial Markets
Issue of 2014‒09‒29
three papers chosen by

  1. A spring-block analogy for the dynamics of stock indexes By Bulcsu Sandor; Zoltan Neda
  2. The imprecision of volatility indexes By Rohini Grover; Ajay Shah
  3. Returns to Active Management: The Case of Hedge Funds By Kazemi, Maziar; Islamaj, Ergys

  1. By: Bulcsu Sandor; Zoltan Neda
    Abstract: A spring-block chain placed on a running conveyor belt is considered for modeling stylized facts observed in the dynamics of stock indexes. Individual stocks are modeled by the blocks, while the stock-stock correlations are introduced via simple elastic forces acting in the springs. The dragging effect of the moving belt corresponds to the expected economic growth. The spring-block system produces collective behavior and avalanche like phenomena, similar to the ones observed in stock markets. An artificial index is defined for the spring-block chain, and its dynamics is compared with the one measured for the Dow Jones Industrial Average. For certain parameter regions the model reproduces qualitatively well the dynamics of the logarithmic index, the logarithmic returns, the distribution of the logarithmic returns, the avalanche-size distribution and the distribution of the investment horizons. A noticeable success of the model is that it is able to account for the gain-loss asymmetry observed in the inverse statistics. Our approach has mainly a pedagogical value, bridging between a complex socio-economic phenomena and a basic (mechanical) model in physics.
    Date: 2014–09
  2. By: Rohini Grover (Indira Gandhi Institute of Development Research); Ajay Shah (National Institute of Public Finance and Policy)
    Abstract: Concerns about sampling noise arise when a VIX estimator is computed by aggregating several imprecise implied volatility estimates. We propose a bootstrap strategy to measure the imprecision of a model based VIX estimator. We find that the imprecision of VIX is economically significant. We propose a model selection strategy,where alternative statistical estimators of VIX are evaluated based on this imprecision.
    Keywords: Implied volatility, volatility index, imprecision
    JEL: G12 G13 G17
    Date: 2014–08
  3. By: Kazemi, Maziar (Board of Governors of the Federal Reserve System (U.S.)); Islamaj, Ergys (Vassar College)
    Abstract: Do more active hedge fund managers generate higher returns than their less active peers? We attempt to answer this question. Using Kalman Filter techniques, we estimate the risk exposure dynamics of a large sample of live and dead equity long-short hedge funds. These estimates are then used to develop a measure of activeness for each hedge fund. Our results show that there exists a nonlinear relationship between activeness and performance. Using raw returns as a measure of performance, it is found that more active funds outperform the less active ones. However, when risk adjusted returns are used to measure performance, we find the opposite results; that is, activeness is inversely related to returns. Still, we find that a few very active managers outperform the moderately active funds and generate higher returns. We conclude that the most active managers use their skills to manage the riskiness of their portfolios and are, therefore, able to provide higher risk adjusted returns. Finally, we find that compared to the least active managers, the most active managers are less homogeneous and, therefore, due diligence is far more important when selecting an active manager.
    Keywords: Hedge funds; Fama-French; active management; dynamic trading
    JEL: G11 G12 G14 G23
    Date: 2014–08–08

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