Version 1
: Received: 14 November 2023 / Approved: 15 November 2023 / Online: 15 November 2023 (09:49:37 CET)
How to cite:
Suen, T.S.(.; Giannikos, C.I.; Guirguis, H.; Kakolyris, A. When to Hedge the Downside Risk?. Preprints2023, 2023110987. https://doi.org/10.20944/preprints202311.0987.v1
Suen, T.S.(.; Giannikos, C.I.; Guirguis, H.; Kakolyris, A. When to Hedge the Downside Risk?. Preprints 2023, 2023110987. https://doi.org/10.20944/preprints202311.0987.v1
Suen, T.S.(.; Giannikos, C.I.; Guirguis, H.; Kakolyris, A. When to Hedge the Downside Risk?. Preprints2023, 2023110987. https://doi.org/10.20944/preprints202311.0987.v1
APA Style
Suen, T.S.(., Giannikos, C.I., Guirguis, H., & Kakolyris, A. (2023). When to Hedge the Downside Risk?. Preprints. https://doi.org/10.20944/preprints202311.0987.v1
Chicago/Turabian Style
Suen, T.S.(., Hany Guirguis and Andreas Kakolyris. 2023 "When to Hedge the Downside Risk?" Preprints. https://doi.org/10.20944/preprints202311.0987.v1
Abstract
For a long-only active equity manager (or investor), the ability to hedge the downside risk before a significant price correction is a valuable skill. The authors proposed constructing a signal that provides timing information for a manager to hedge the downside risk. This systematic signal can help a manager put on a hedge before the price corrections of the dot com bubble in 2000 and the global financial crisis in 2008. The signal is constructed for each GICS sector index in the S&P 500. When a sector’s PE indicates a high valuation and, at the same time, if the high valuation sector’s correlations with some other sectors are out of their historical norm, then these two conditions contribute a timing signal for the significant price swing of the index during the following six months. After observing the timing signal, managers can benefit significantly by hedging the downside risk. The signal can also be interpreted as the beginning of a high volatility regime for a sector.
Copyright:
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
