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

Josua Gösmann () and Daniel Ziggel ()
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Josua Gösmann: Ruhr-Universität Bochum
Daniel Ziggel: FOM Hochschule für Oekonomie und Management

Journal of Asset Management, 2018, vol. 19, issue 2, No 3, 99-109

Abstract: 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.

Keywords: Trading strategies; Equity indices; Change points; Risk management; Hypothesis testing (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1057/s41260-017-0062-7

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