Volatility Asymmetry as a Risk Factor and Product Innovation in Asset Management

Abstract

In the dynamic landscape of financial markets, the quest for understanding and managing risks has never been more critical. This research embarks on a comprehensive exploration of three distinct yet interconnected areas within the realm of financial research, each shedding light on crucial facets of risk management and financial innovation. The inquiry encompasses the study of volatility asymmetry as a potent risk factor, the examination of product innovation in the asset management industry, and the development of a novel method to enhance hedging performance using VIX futures in the Ordinary Least Squares (OLS) approach. In the exploration of volatility asymmetry as a pivotal risk factor, Chapter 1 delves into the intricate nature of volatility—a fundamental metric in financial markets that extends beyond mere statistical parameters. Rather, it serves as a potent harbinger of risk and uncertainty, influencing investment landscapes and portfolio dynamics. The research meticulously investigates the phenomenon of volatility asymmetry, where varying magnitudes of upward and downward market movements become a defining element shaping asset prices. By scrutinizing these asymmetrical volatility patterns, the study seeks to unveil their profound implications on investment decision-making and portfolio management, providing valuable insights into effective risk mitigation strategies. This comprehensive examination establishes a noteworthy relationship between volatility asymmetry and future returns for individual securities. Proposing a robust theoretical background to elucidate this relationship, the research subsequently rigorously tests the presence of a risk premium associated with volatility asymmetry. Covering a vast dataset comprising all individual stocks listed on US exchanges over a span of 30 years, this study contributes empirically grounded insights into the enduring interplay between volatility asymmetry and financial market dynamics. Within the perpetual evolution of the asset management industry, characterized by an unwavering commitment to enhancing investor outcomes, a notable surge in product innovation has unfolded. Chapter 2 strategically adopts a framework of innovation types, tailoring it to better suit the nuances of the asset management landscape. Focusing specifically on the Korean asset management industry, the study meticulously selects and analyzes innovative products that have left an indelible mark on its history, aiming to discern the determinants of success and the strategic approaches employed by major asset managers. From the advent of exchange-traded funds (ETFs) to the implementation of algorithmic trading strategies, the examination extends to the diverse spectrum of financial instruments that have redefined the industry. By unraveling the relations between these innovative products and asset managers, the study aspires to provide a comprehensive understanding of the evolving financial landscape. Scrutinizing the motivations that propel product innovation, the study endeavors to contribute nuanced insights into the dynamic shifts within the Korean asset management industry and their consequential implications for investors. Through a meticulous analysis of the strategies adopted by key players, this research seeks to not only capture the essence of product innovation but also illuminate the multifaceted dynamics shaping the future trajectory of the asset management sector. Chapter 3 is also on volatility but focuses on using volatility in hedging downside risk. Effective risk management is a cornerstone of financial success, and hedging plays a pivotal role in mitigating downside exposure. This research introduces a novel approach to hedging by leveraging the Volatility Index (VIX) futures within the framework of Ordinary Least Squares (OLS). Through a meticulous examination of historical data and empirical analysis, the study seeks to establish a robust methodology for enhancing hedging performance. By integrating the predictive power of VIX futures into the OLS framework, the research aspires to offer practitioners a more effective tool for managing risk in volatile market conditions. In synthesizing these three research strands, this thesis aims to contribute valuable insights to the broader discourse on risk factor, risk management and financial innovation. Through empirical analyses, theoretical frameworks, and practical applications, it aspires to deepen the understanding of the intricate relationships that govern financial markets and empower investors and industry professionals with knowledge that transcends market uncertainties.