Performance of Tail Hedged Portfolio with Third Moment Variation Swap

Performance of Tail Hedged Portfolio with Third Moment Variation Swap 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Computational Economics Springer Journals

Performance of Tail Hedged Portfolio with Third Moment Variation Swap

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Publisher
Springer US
Copyright
Copyright © 2016 by Springer Science+Business Media New York
Subject
Economics; Economic Theory/Quantitative Economics/Mathematical Methods; Computer Appl. in Social and Behavioral Sciences; Operations Research/Decision Theory; Behavioral/Experimental Economics; Math Applications in Computer Science
ISSN
0927-7099
eISSN
1572-9974
D.O.I.
10.1007/s10614-016-9593-0
Publisher site
See Article on Publisher Site

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