Trends in the South African Hedging Space Part II: Measuring Risk and Finding Return
Peregrine Securities 2013
32 Pages Posted: 22 Apr 2016
Date Written: October 4, 2013
This report focusses on three particular areas of risk, effectively covering high-level risk drivers, low-level risk interactions and finally cross-sectional risk opportunities.
1) In prior work, we showed that a simple 3-factor global model explained a high percentage of local equity index movement up to mid-2008. We update our model and show a recent decoupling of local and global markets and the introduction of a risk on/risk off factor.
2) We examine whether the 'myth of diversification' (greater dependence during market crashes) holds true for South African markets by introducing the idea of exceedence risk measures. We also showcase several alternative asset classes that provide natural diversification potential for long-only portfolios 3) We study the cross-sectional volatility (CSV) of South African equity markets and show that it is a good measure of the opportunity set available to managers. Building on this, we outline a simple method to correct fund performance measures for the changing CSV backdrop and thus obtain better measures of manager skill.
Keywords: risk factor modelling, best-subsets regression, exceedence correlation, conditional correlation, cross-sectional volatility
JEL Classification: C14, C15, C21, C22, C4
Suggested Citation: Suggested Citation