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High moment variations and their application

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  • Geon Ho Choe
  • Kyungsub Lee

Abstract

We propose a new method of measuring the third and fourth moments of return distribution based on quadratic variation method when the return process is assumed to have zero drift. The realized third and fourth moments variations computed from high frequency return series are good approximations to corresponding actual moments of the return distribution. An investor holding an asset with skewed or fat-tailed distribution is able to hedge the tail risk by contracting the third or fourth moment swap under which the float leg of realized variation and the predetermined fixed leg are exchanged. Thus constructed portfolio follows more Gaussian-like distribution and hence the investor effectively hedge the tail risk.

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  • Geon Ho Choe & Kyungsub Lee, 2013. "High moment variations and their application," Papers 1311.4973, arXiv.org.
  • Handle: RePEc:arx:papers:1311.4973
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    References listed on IDEAS

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    Cited by:

    1. Kyungsub Lee, 2013. "Probabilistic and statistical properties of moment variations and their use in inference and estimation based on high frequency return data," Papers 1311.5036, arXiv.org, revised Jul 2015.

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