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

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 a...

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Bibliographic Details
Published in:Journal of asset management 2018-03, Vol.19 (2), p.99-109
Main Authors: Gösmann, Josua, Ziggel, Daniel
Format: Article
Language:English
Subjects:
Economics and Finance
Equity
Finance
Financial Services
Hypothesis testing
Original Article
Risk Management
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Summary: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.
ISSN:1470-8272
1479-179X
DOI:10.1057/s41260-017-0062-7