Revista de Negócios e Economia

Managing Market Price Risks

Abstract

Denisa Cumova and Berenberg Gossler

Being exposed to financial market price risk is an omnipresent aspect of investing. This includes the risk of capital losses when investing in the stock or bond market or the risk of currency fluctuations when investing abroad. In this article, we compare symmetric and asymmetric hedging approaches. We argue that asymmetric hedging is the better choice for most investors. We discuss active hedging based on trend-following models and suggest a passive option-based strategy to benchmark them. Here we find that trend-following models often are superior to the optionbased strategy. Finally, we identify three market characteristics, which may have a significant impact on the outperformance of trend-following models over passive option-based hedging strategies: the relationship between the historical and implied volatility, the occurrence of large price movements and the presence of high short-term noise in the market.