Segal Graduate School of Business Final Projects

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A PERFORMANCE COMPARISON OF HEDGE FUNDS, HEDGED MUTUAL FUNDS AND HEDGE FUND ETFS

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2015-12
Abstract: 

Hedged mutual funds and hedge fund ETFs are new entrants to the market thatallow individual investors to invest in funds using hedge fund strategies.

 

In this paper, we study the performance of these two funds relative to the traditional hedge funds to see if the three asset classes are comparable investments. We use four performance measurement models, including CAPM, Fama French three factor model, Carhart four factor model and Fung and Hsieh eight factor model, to test the fund performance for the period of 2004 to 2015.

 

Our study shows hedge funds on average generate a positive alpha during the entire testing period and the sub-periods. Whereas, most hedged mutual funds constantly underperform the traditional benchmarks. During the period of April 2009 to January 2015, when hedge fund ETFs exist in the market, we find hedge fund ETFs outperform the hedged mutual funds, but underperform the traditional hedge funds.

 

The conclusion may be justified by the hedge fund managers’ asset allocation skills and the ability to quickly react to the macroeconomic factors.

Document type: 
Graduating extended essay / Research project
Senior supervisor: 
Peter Klein

FUND OF HEDGE FUNDS ALLOCATION STRATEGIES WITH NON-NORMAL RETURN DISTRIBUTIONS

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2015-12
Document type: 
Graduating extended essay / Research project
Senior supervisor: 
Peter Klein

PRICING VOLATILITY SWAP USING HESTON STOCHASTIC VOLATILITY MODEL

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2015-12
Abstract: 

In this paper, we price the volatility swap as an OTC derivatives aimed for direct trading of volatility. Our pricing method is based on a PDE approach on Heston stochastic volatility model. Heston model has received the most attention since it can give a satisfactory description of the underlying asset dynamics. We follow the PDE approach suggested by Broadie and Jain (2008) to price volatility swap.

 

In addition to their work, we also

  • Use loss function minimization to calibrate the Heston parameters to the current data on S&P 500 index and construct implied volatility surface.
  • Solve the PDE using numerical computation, Crank-Nicolson finite difference method.
  • Price the volatility swap and compare our model expected volatility (fair volatility strike) with the realized volatility, in order to assess the accuracy of this approach.

Our result shows that the model fair volatility strike is close to the realized volatility for long maturity swaps.

Document type: 
Graduating extended essay / Research project
Senior supervisor: 
Andrey Pavlov

INFORMATIONAL CONTENT OF IMPLIED AND HISTORICAL VOLATILITY DURING SUB-PRIME CRISIS

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2015-12
Abstract: 

The initial paper had concluded that implied volatility is not a good predictor of the realized volatility, and instead historical volatility does a better job of explaining the realized volatility. Based on our findings from the data during the subprime crisis, we observe that both implied volatility and historical volatility are not efficient predictors of future volatility, but when compared, implied volatility does a better job than historical volatility. Our findings differ from the original research as we used a different time-period, and the findings are in line with logical reasoning as during periods of high volatility, historical volatility does not give any prediction of future volatility as circumstances change drastically.

Document type: 
Graduating extended essay / Research project
Senior supervisor: 
Andrey Pavlov

THE PRICING OF VOLATILITY RISK IN CROSS-SECTIONAL EQUITY REIT RETURNS

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2015-12
Abstract: 

This study examines the pricing of volatility risk in the cross-sectional equity Real Estate Investment Trust (REIT) stocks returns over the 2002-2014 period. The volatility risk of stock returns is decomposed into systematic volatility and idiosyncratic volatility.We estimate the systematic risk by the residual of VIX after applying GARCH (1,1). We estimate idiosyncratic risk by using the residual from Fama and French three-factor model.Overall, we conclude that neither systematic volatility nor idiosyncratic volatility are directly priced in the equity REIT returns over time.

Document type: 
Graduating extended essay / Research project
Senior supervisor: 
Andrey Pavlov

INSTITUTIONAL OWNERHSIP AND ABNORMAL RETURNS

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2015-12
Abstract: 

We have two hypotheses in our paper: higher institutional ownership is associated with lower abnormal returns because of less information asymmetry, or is associated with higher abnormal returns because of institutional investors’ ability to pick better stocks. We test which of these two hypotheses concerning the effect of institutions dominates. We categorize all companies listed on the 13F schedule of Thompson-Reuters over the period 1980-2014 into five portfolios and rebalance the portfolios annually based on their level of institutional ownership percentage. We determine portfolio’s abnormal return by conducting regression on portfolio returns based on CAPM and Fama French and Carhart four-factor model. Our finding is, in general, portfolios with higher institutional ownership tend to have higher abnormal returns. We also find that the higher the institutional ownership percentage of one portfolio, the more five-year periods during which the portfolio has abnormal returns. In addition, the abnormal returns of portfolio formed by going long on highest-institutional-ownership and short on lowest-institutional ownership portfolio are significantly positive based on CAPM Model from 1980 to 2014 but are not significantly different from zero in most five-year time periods.

Document type: 
Graduating extended essay / Research project
Senior supervisor: 
Amir Rubin

INSTITUTIONAL OWNERHSIP AND ABNORMAL RETURNS

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2015-12
Abstract: 

We have two hypotheses in our paper: higher institutional ownership is associated with lower abnormal returns because of less information asymmetry, or is associated with higher abnormal returns because of institutional investors’ ability to pick better stocks. We test which of these two hypotheses concerning the effect of institutions dominates. We categorize all companies listed on the 13F schedule of Thompson-Reuters over the period 1980-2014 into five portfolios and rebalance the portfolios annually based on their level of institutional ownership percentage. We determine portfolio’s abnormal return by conducting regression on portfolio returns based on CAPM and Fama French and Carhart four-factor model. Our finding is, in general, portfolios with higher institutional ownership tend to have higher abnormal returns. We also find that the higher the institutional ownership percentage of one portfolio, the more five-year periods during which the portfolio has abnormal returns. In addition, the abnormal returns of portfolio formed by going long on highest-institutional-ownership and short on lowest-institutional ownership portfolio are significantly positive based on CAPM Model from 1980 to 2014 but are not significantly different from zero in most five-year time periods.

Document type: 
Graduating extended essay / Research project
Senior supervisor: 
Amir Rubin

INSTITUTIONAL OWNERHSIP AND ABNORMAL RETURNS

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2015-12
Abstract: 

We have two hypotheses in our paper: higher institutional ownership is associated with lower abnormal returns because of less information asymmetry, or is associated with higher abnormal returns because of institutional investors’ ability to pick better stocks. We test which of these two hypotheses concerning the effect of institutions dominates. We categorize all companies listed on the 13F schedule of Thompson-Reuters over the period 1980-2014 into five portfolios and rebalance the portfolios annually based on their level of institutional ownership percentage. We determine portfolio’s abnormal return by conducting regression on portfolio returns based on CAPM and Fama French and Carhart four-factor model.

Our finding is, in general, portfolios with higher institutional ownership tend to have higher abnormal returns. We also find that the higher the institutional ownership percentage of one portfolio, the more five-year periods during which the portfolio has abnormal returns. In addition, the abnormal returns of portfolio formed by going long on highest-institutional-ownership and short on lowest-institutional ownership portfolio are significantly positive based on CAPM Model from 1980 to 2014 but are not significantly different from zero in most five-year time periods.

Document type: 
Graduating extended essay / Research project

INSTITUTIONAL OWNERHSIP AND ABNORMAL RETURNS

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2015-12
Abstract: 

We have two hypotheses in our paper: higher institutional ownership is associated with lower abnormal returns because of less information asymmetry, or is associated with higher abnormal returns because of institutional investors’ ability to pick better stocks. We test which of these two hypotheses concerning the effect of institutions dominates. We categorize all companies listed on the 13F schedule of Thompson-Reuters over the period 1980-2014 into five portfolios and rebalance the portfolios annually based on their level of institutional ownership percentage. We determine portfolio’s abnormal return by conducting regression on portfolio returns based on CAPM and Fama French and Carhart four-factor model.

Our finding is, in general, portfolios with higher institutional ownership tend to have higher abnormal returns. We also find that the higher the institutional ownership percentage of one portfolio, the more five-year periods during which the portfolio has abnormal returns. In addition, the abnormal returns of portfolio formed by going long on highest-institutional-ownership and short on lowest-institutional ownership portfolio are significantly positive based on CAPM Model from 1980 to 2014 but are not significantly different from zero in most five-year time periods.

Document type: 
Graduating extended essay / Research project

INSTITUTIONAL OWNERHSIP AND ABNORMAL RETURNS

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2015-12
Abstract: 

We have two hypotheses in our paper: higher institutional ownership is associated with lower abnormal returns because of less information asymmetry, or is associated with higher abnormal returns because of institutional investors’ ability to pick better stocks. We test which of these two hypotheses concerning the effect of institutions dominates. We categorize all companies listed on the 13F schedule of Thompson-Reuters over the period 1980-2014 into five portfolios and rebalance the portfolios annually based on their level of institutional ownership percentage. We determine portfolio’s abnormal return by conducting regression on portfolio returns based on CAPM and Fama French and Carhart four-factor model.

Our finding is, in general, portfolios with higher institutional ownership tend to have higher abnormal returns. We also find that the higher the institutional ownership percentage of one portfolio, the more five-year periods during which the portfolio has abnormal returns. In addition, the abnormal returns of portfolio formed by going long on highest-institutional-ownership and short on lowest-institutional ownership portfolio are significantly positive based on CAPM Model from 1980 to 2014 but are not significantly different from zero in most five-year time periods.

Document type: 
Graduating extended essay / Research project