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An innovative risk management methodology for trading equity indices based on change points

Author

Listed:
  • Josua Gösmann

    (Ruhr-Universität Bochum)

  • Daniel Ziggel

    (FOM Hochschule für Oekonomie und Management)

Abstract

We propose two new trading strategies which are based on a mathematical hypothesis testing procedure identifying change points in the volatility structure of equity indices. In the first strategy, we use the detected change points in order to avoid market phases of high volatility and to allow for an equity investment with significantly reduced risk. Within the second strategy, a modification is used for a pair trading approach, which leads to a promising market neutral strategy. The robustness of the proposed strategies is verified by different statistical procedures. The results strongly indicate the usefulness of both approaches for institutional investors.

Suggested Citation

  • Josua Gösmann & Daniel Ziggel, 2018. "An innovative risk management methodology for trading equity indices based on change points," Journal of Asset Management, Palgrave Macmillan, vol. 19(2), pages 99-109, March.
    • Handle: RePEc:pal:assmgt:v:19:y:2018:i:2:d:10.1057_s41260-017-0062-7
    DOI: 10.1057/s41260-017-0062-7
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    References listed on IDEAS

    as
    1. Campbell, Rachel A.J. & Forbes, Catherine S. & Koedijk, Kees G. & Kofman, Paul, 2008. "Increasing correlations or just fat tails?," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 287-309, March.
    2. Dominik Wied & Matthias Arnold & Nicolai Bissantz & Daniel Ziggel, 2012. "A new fluctuation test for constant variances with applications to finance," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 75(8), pages 1111-1127, November.
    3. Galeano, Pedro & Peña, Daniel, 2004. "Variance changes detection in multivariate time series," DES - Working Papers. Statistics and Econometrics. WS ws041305, Universidad Carlos III de Madrid. Departamento de Estadística.
    4. Dominik Wied & Daniel Ziggel & Tobias Berens, 2013. "On the application of new tests for structural changes on global minimum-variance portfolios," Statistical Papers, Springer, vol. 54(4), pages 955-975, November.
    5. Galeano, Pedro & Wied, Dominik, 2014. "Multiple break detection in the correlation structure of random variables," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 262-282.
    6. Wied, Dominik & Krämer, Walter & Dehling, Herold, 2012. "Testing For A Change In Correlation At An Unknown Point In Time Using An Extended Functional Delta Method," Econometric Theory, Cambridge University Press, vol. 28(3), pages 570-589, June.
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    Cited by:

    1. Yingying Sun & Kexin Bi & Shi Yin, 2020. "Measuring and Integrating Risk Management into Green Innovation Practices for Green Manufacturing under the Global Value Chain," Sustainability, MDPI, vol. 12(2), pages 1-33, January.

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