Fundamental and Technical Analysis for Developed and Emerging Capital Markets Indices Hedging Using Options

The study is devoted to the analysis of the effectiveness of hedging indices of developed and emerging stock markets using options or option strategies. The aim of the work is to develop an optimal portfolio of stock index and hedging option strategy. The conditions for hedging are determined by fundamental multipliers and indicators of technical analysis. When determining the optimal portfolio structure, the optimized parameter is the Sharpe ratio. The system is optimized and tested in the markets of 20 countries, 10 of which are emerging. The main hypothesis of the study is that hedging indices of developed markets brings best results. Testing showed that in the training sample for all the countries studied, there are such combinations of indicator parameters and option strategies that allow achieving greater Sharpe ratios compared to buying shares from the stock index. On test data for 16 out of 20 countries, the Sharpe ratios for optimal portfolios were higher than the “buy & hold” strategy. At the same time, the markets where the B&H strategy wins are developed ones, which may indicate their greater efficiency. It was also revealed on test data that the system can significantly reduce losses, while not yielding in returns when the stock index grows at a relatively high rate (for example, 15% per year or more).