Stefan Meyer began his career as an advisor and portfolio manager in 1987 in Cologne. He has been an admitted exchange trader at Eurex since 2003, Head Trader for Merck Finck Privatbankiers in Munich since 2010 and Supervisor for trading at Eurex and certified exchange trader for Deutsche Börse AG in Frankfurt since 2016. He is currently responsible for derivatives trading at Eurex and on third-party exchanges worldwide.
He will defend his Executive Doctorate of Business Administration (EDBA) in September 2023, on the theme “”Portfolio management in economic crises: An investigation of effective hedging strategies with exchange-traded options and futures for crisis management”” under the supervision of Professor Marco Heimann, Professor at the University of Lyon.
Thesis Direction
Pr Marco Heimann
Thesis Title
Portfolio management in economic crises: An investigation of effective hedging strategies with exchange-traded options and futures for crisis management
Abstract
Economic crises can cause significant damage to economies worldwide and imply welfare losses for many market participants. The debate on the effectiveness and impact of derivative financial instruments in managing financial crises is controversial between proponents of neoclassical capital market theory and those of behavioral finance due to different assumptions.
In this paper, I have investigated which hedging strategies with exchange-traded options and futures can be successfully used for portfolio management in economic crises. The focus of this work is on the standardised option strategies of Eurex. In addition, there are the single leg positions Sell Call, Protective Put and the Future Hedge, which are much discussed in the literature.
For this purpose, I analysed price, interest rate and volatility data for the twelve largest crises between 1987 and 2022 and used them to reconstruct the development of portfolios with and without derivative strategies. For this purpose, I calculated the daily settlement prices of the options with the R programming environment according to Black-Scholes-Merton.
For the evaluation, I then calculated the mean values of the success and risk ratios for each strategy over the twelve crisis scenarios and grouped the individual strategies into eight clusters using common contract specifications. Using Welch’s t-tests, I then tested the significance of the results.
Overall, the results indicate that there are significant differences between the performance of the reference portfolio without derivatives and the performance of portfolios with derivative hedging strategies for most of the performance and risk indicators examined. In summary, Welch’s t-tests performed on ten financial performance indicators show significant differences between the performance of the reference portfolio and the performance of portfolios with derivative strategies for the majority of the indicators examined. The results suggest that several strategy clusters generally outperform the reference portfolio in terms of return, risk-adjusted performance and downside risk indicators. This shows the fundamental benefit of the financial derivatives used with regard to the reduction of the general market risk, even if it became apparent in the calculations that not all the strategies examined are suitable for reducing the general market risk.
The results fit better with the view of the representatives of behavioural economics, for whom derivatives help financial instruments in times of crisis to limit risks and distribute them efficiently among several market participants. The results also show that the concern of the representatives of neoclassical capital market theory that derivatives contribute to an increase in the volatility of the capital market by inflating the trading volume detached from fundamental values for predominantly speculative reasons is generally not justified.
For this thesis I applied the quantitative research methodology. For the calculations of the performance and risk ratios, the sensitivity ratios and the option prices, I used the historical price data of the Deutsche Aktienindex of Deutsche Börse AG, the price data of the VDAX-New and the Dax Futures from Eurex and interest rate data from the interest rate statistics of the Deutsche Bundesbank and Bloomberg.