International Finance

Permanent URI for this collectionhttps://hdl.handle.net/10679/314

Browse

Browsing by Institution Author "ÇAĞLAYAN, Mustafa Onur"

Filter results by typing the first few letters
Now showing 1 - 3 of 3
  • Thumbnail Image
    ArticlePublicationOpen Access
    Development and calibration of a currency trading strategy using global optimization
    (Springer Science+Business Media, 2013-06) Çağlayan, Mustafa Onur; Pinter, Janos D.; Economics; Industrial Engineering; ÇAĞLAYAN, Mustafa Onur; PINTER, Janos
    We have developed a new financial indicator—called the Interest Rate Differentials Adjusted for Volatility (IRDAV) measure—to assist investors in currency markets. On a monthly basis, we rank currency pairs according to this measure and then select a basket of pairs with the highest IRDAV values. Under positive market conditions, an IRDAV based investment strategy (buying a currency with high interest rate and simultaneously selling a currency with low interest rate, after adjusting for volatility of the currency pairs in question) can generate significant returns. However, when the markets turn for the worse and crisis situations evolve, investors exit such money-making strategies suddenly, and—as a result—significant losses can occur. In an effort to minimize these potential losses, we also propose an aggregated Risk Metric that estimates the total risk by looking at various financial indicators across different markets. These risk indicators are used to get timely signals of evolving crises and to flip the strategy from long to short in a timely fashion, to prevent losses and make further gains even during crisis periods. Since our proprietary model is implemented in Excel as a highly nonlinear “black box” computational procedure, we use suitable global optimization methodology and software—the Lipschitz Global Optimizer solver suite linked to Excel—to maximize the performance of the currency basket, based on our selection of key decision variables. After the introduction of the new currency trading model and its implementation, we present numerical results based on actual market data. Our results clearly show the advantages of using global optimization based parameter settings, compared to the typically used “expert estimates” of the key model parameters.
  • Placeholder
    ArticlePublicationMetadata only
    Macroeconomic risk and hedge fund returns
    (Elsevier, 2014-10) Bali, T. G.; Brown, S. J.; Çağlayan, Mustafa Onur; Economics; ÇAĞLAYAN, Mustafa Onur
    This paper estimates hedge fund and mutual fund exposure to newly proposed measures of macroeconomic risk that are interpreted as measures of economic uncertainty. We find that the resulting uncertainty betas explain a significant proportion of the cross-sectional dispersion in hedge fund returns. However, the same is not true for mutual funds, for which there is no significant relationship. After controlling for a large set of fund characteristics and risk factors, the positive relation between uncertainty betas and future hedge fund returns remains economically and statistically significant. Hence, we argue that macroeconomic risk is a powerful determinant of cross-sectional differences in hedge fund returns.
  • Placeholder
    ArticlePublicationMetadata only
    Systematic risk and the cross section of hedge fund returns
    (Elsevier, 2012-10) Bali, T. G.; Brown, S. J.; Çağlayan, Mustafa Onur; Economics; ÇAĞLAYAN, Mustafa Onur
    This paper investigates the extent to which market risk, residual risk, and tail risk explain the cross-sectional dispersion in hedge fund returns. The paper introduces a comprehensive measure of systematic risk (SR) for individual hedge funds by breaking up total risk into systematic and fund-specific or residual risk components. Contrary to the popular understanding that hedge funds are market neutral, we find that systematic risk is a highly significant factor explaining the dispersion of cross-sectional returns while at the same time measures of residual risk and tail risk seem to have little explanatory power. Funds in the highest SR quintile generate 6% more average annual returns compared with funds in the lowest SR quintile. After controlling for a large set of fund characteristics and risk factors, systematic risk remains positive and highly significant, whereas the relation between residual risk and future fund returns continues to be insignificant. Hence, systematic risk is a powerful determinant of the cross-sectional differences in hedge fund returns.