Sangbae Kim

The Hedge Ratio and the Empirical Relationship between the Stock and Futures Markets: A New Approach Using Wavelet Analysis

This paper examines the relationship between the stock and futures markets in terms of lead-lag relationship, correlation, and the hedge ratio using wavelet analysis. Empirical results show that (1) there is a feedback relationship between the stock and futures markets regardless of time scales, (2) wavelet correlation between two markets varies over investment horizons but remains very high, and (3) hedge ratio and the effectiveness of hedging strategies increase as the wavelet time scale increases. Simulation for utility comparisons shows that hedging effectiveness depends not only on the time scale but also on the risk aversion coefficient of an individual investor.

International Stock Market Linkages: Evidence from the Asian Financial Crisis

This article investigates dynamic linkages and interactions of Asian stock markets using a Vector Autoregression (VAR) model. Our findings show that during the financial crisis the markets became more closely linked, with the exception of Malaysia. The article finds that Singapore and Aus tralia exerted increased linkages on the other Asian stock markets during the crisis. The results also show that while the US market maintained its ties with the Asian markets, the US market remained independent during the crisis.

Multihorizon Sharpe Ratios

Wavelet analysis represents a new approach to investigating the empirical relationship between the Sharpe ratio and the investment horizon for portfolios of small stocks, large stocks, and intermediate–term and long–term bonds. A wavelet multiscale approach decomposes a given time series on a scale–by–scale basis. Empirical results indicate that the wavelet variance declines as the wavelet scale increases, implying that an investor with a short investment horizon must respond to every fluctuation in realized returns, while an investor with a much longer horizon faces much less significant long–run risk associated with unknown expected returns. The long scale Sharpe ratio is much higher than the short scale, implying that the Sharpe ratio is not time–consistent. Finally, stock portfolios have higher Sharpe ratios than bond portfolios, except in certain–length periods, indicating that evaluation of the performance of stock and bond portfolios should account for investment horizon.

Portfolio allocation and the investment horizon: a multiscaling approach

A new approach is proposed for analysing portfolio allocation over various time scales. This new approach is based on wavelet analysis, which decomposes a given time series on a scale-by-scale basis. Empirical results indicate that, as the investment horizon lengthens, a greater weighting should be allocated to stocks. An explanation for this result is that the mean-reverting property of stock returns causes investors to perceive that stocks are less risky than bonds and T-bills at longer time scales compared with shorter time scales. When we include the effect of risk aversion, it is found that the higher the risk aversion, the less the Sharpe ratio, indicating that a more conservative investor prefers a smoother consumption stream.

On timing ability in Australian managed funds

This paper investigates the timing abilities of Australian managed fund managers. To examine timing abilities, the cross-sectional bootstrap approach is adopted to determine whether timing ability is due to skill or luck. Based on three alternative timing measures, we find that top-ranked Australian fund managers have genuine timing abilities. In addition, the poor timing ability with bottom-ranked funds is not likely to be due to luck either, implying that the market exposure of some Australian managed funds is mistakenly adjusted when the stock market improves.

Explaining mispricing with Fama-French factors : new evidence from the multiscaling approach

This article examines the Capital Asset Pricing Model (CAPM) over different frequencies utilizing a recently developed multiscaling method: wavelet analysis. Our empirical analysis shows that the risk factors are more relevant at the lower frequencies than at the higher frequencies in the traditional CAPM. In addition, the overreaction-related mispricing hypothesis explains the size effect but not the value premium. After incorporating the two risk factors (Small Minus Big (SMB) and High Minus Low (HML)), our empirical findings support the positive relationship between market risk and mean returns for big stocks, but not small stocks.