Publicação
Dynamic hedging and risk management: A value-at-risk analysis in a diversified portfolio
| Resumo: | The volatility observed during the COVID-19 pandemic and geopolitical tensions has highlighted the need for risk management in financial markets. This thesis aims to estimate potential losses and implement dynamic hedging strategies using the Value-at-Risk risk metric. The study measures and manages the daily VaR of a diversified portfolio composed of equities and bonds from the U.S., European, and Asian markets. Considering 15 configurations from four different VaR models, Parametric Normal, Skewed Generalized Student-t, Historical Simulation, and Quantile Regression, the modes are evaluated through backtesting. The chosen model is then used to estimate daily VaR over a one-year horizon and to decompose it by risk factors, identifying the main contributors to risk. By doing so, a dynamic equity hedging strategy is implemented to mitigate risk, ensuring that the portfolio risk remains within a predefined target. The effectiveness of the strategy is assessed using performance metrics such as Return on Risk-Adjusted Capital and Profit and Loss. Results show that the hedged portfolio outperforms the unhedged portfolio by protecting against additional losses and increasing the Return on Risk-Adjusted Capital, while also improving diversification across hedged equity exposures and redistributing risk across portfolio risk factors. |
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| Autores principais: | Barreira, Mariana da Cunha |
| Assunto: | Value-at-risk Capital económico -- Economic capital Backtesting Marginal VaR contributions Equity hedging Return on risk-adjusted capital |
| Ano: | 2025 |
| País: | Portugal |
| Tipo de documento: | dissertação de mestrado |
| Tipo de acesso: | acesso aberto |
| Instituição associada: | ISCTE |
| Idioma: | inglês |
| Origem: | Repositório ISCTE |
| Resumo: | The volatility observed during the COVID-19 pandemic and geopolitical tensions has highlighted the need for risk management in financial markets. This thesis aims to estimate potential losses and implement dynamic hedging strategies using the Value-at-Risk risk metric. The study measures and manages the daily VaR of a diversified portfolio composed of equities and bonds from the U.S., European, and Asian markets. Considering 15 configurations from four different VaR models, Parametric Normal, Skewed Generalized Student-t, Historical Simulation, and Quantile Regression, the modes are evaluated through backtesting. The chosen model is then used to estimate daily VaR over a one-year horizon and to decompose it by risk factors, identifying the main contributors to risk. By doing so, a dynamic equity hedging strategy is implemented to mitigate risk, ensuring that the portfolio risk remains within a predefined target. The effectiveness of the strategy is assessed using performance metrics such as Return on Risk-Adjusted Capital and Profit and Loss. Results show that the hedged portfolio outperforms the unhedged portfolio by protecting against additional losses and increasing the Return on Risk-Adjusted Capital, while also improving diversification across hedged equity exposures and redistributing risk across portfolio risk factors. |
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