Outperforming Benchmarks with Their Derivatives: Theory and Empirical Evidence

28 Pages Posted: 15 Jun 2016

See all articles by Alejandro Balbás

Alejandro Balbás

Charles III University of Madrid - Department of Business Administration

Beatriz Balbas

University of Castilla-La Mancha

Raquel Balbás

Universidad Complutense de Madrid (UCM)

Date Written: April 13, 2016

Abstract

Recent literature has demonstrated the existence of an unbounded risk premium if one combines the most important models for pricing and hedging derivatives with coherent risk measures. There may exist combinations of derivatives (good deals) whose pair (return risk) converges to the pair (+∞, −∞). This paper goes beyond existence properties and looks for optimal explicit constructions and empirical tests. It will be shown that the optimal good deal above may be a simple portfolio of options. This theoretical finding will enable us to implement empirical experiments involving three international stock index futures (Standard & Poor's 500, Eurostoxx 50 and DAX 30) and three commodity futures (gold, Brent and the Dow Jones-UBS Commodity Index). According to the empirical results, the good deal always outperforms the underlying index/commodity. The good deal is built in full compliance with the standard derivative pricing theory. Properties of classical pricing models totally inspire the good deal construction. This is a very interesting difference in our paper with respect to previous literature attempting to outperform a benchmark.

Keywords: market efficiency, derivative pricing, risk measure, conditional value-at-risk (CVaR), good deal

Suggested Citation

Balbás de la Corte, Alejandro and Balbas, Beatriz and Balbás, Raquel, Outperforming Benchmarks with Their Derivatives: Theory and Empirical Evidence (April 13, 2016). Journal of Risk, Vol. 18, No. 4, 2016, Available at SSRN: https://ssrn.com/abstract=2795072

Alejandro Balbás de la Corte (Contact Author)

Charles III University of Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Beatriz Balbas

University of Castilla-La Mancha ( email )

Plaza Universidad, 1
02071 Albacete, Ciudad Real 13071
Spain

Raquel Balbás

Universidad Complutense de Madrid (UCM) ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
0
Abstract Views
772
PlumX Metrics