Value of hedge and expected returns

Jinpeng Ma, Max Tang, Yuming Wang

Research output: Contribution to journalArticlepeer-review

Abstract

We demonstrate how it is possible to generate value for an investor with a hedge attached to the buy-and-hold strategy of an S&P 500 index fund. We study the S&P 500 index portfolio (not including dividends) and the value-weighted S&P 500 index portfolio (including dividends) of the Center for Research in Securities Prices for 1967:01–2011:12, using the capacity utilization and the unemployment rates in real time to determine if a hedge position should be initiated or closed. A hedge is initiated if the capacity utilization, the unemployment rate or a combination of the two signals a contraction in the real economy. The hedge position is closed if it signals otherwise an expansion. We use utility gains (Campbell and Thompson 2008), the manipulation-proof performance measure (MPPM) statistics (Ingersoll et al. 2007) and the P-Sharpe ratio (Bailey and López de Prado 2012) to evaluate the performance of a particular hedge strategy. The empirical results show that there are infinitely many hedges that can generate positive utility gains, higher MPPM statistics and higher P-Sharpe ratios.

Original languageEnglish (US)
Pages (from-to)3373-3398
Number of pages26
JournalApplied Economics
Volume48
Issue number36
DOIs
StatePublished - Aug 1 2016

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Hedge strategies
  • P-Sharpe ratios
  • business cycle
  • equal and value-weighted S&P 500 indices
  • index portfolios
  • the Sharpe ratio efficient frontier

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