Duration-Hedging Trades, Return Momentum and Reversal

60 Pages Posted: 28 Feb 2020 Last revised: 2 Jul 2021

See all articles by Zhanhui Chen

Zhanhui Chen

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Pingyi Lou

Fudan University - School of Economics

Wenjun Zhu

Nanyang Business School, Nanyang Technological University

Date Written: December 1, 2019

Abstract

We study the duration-hedging trades of duration-sensitive strategic investors, i.e., pensions and life insurers. We use longevity shocks to identify their duration-hedging trades. Longevity shocks affect these investors' liability duration and induce them to adjust their asset duration. When longevity shocks are low (high), they buy more short- (long-) duration stocks and sell more long- (short-) duration stocks. Because prior winners (losers) have shorter (longer) duration, they behave like momentum (contrarian) traders when longevity shocks are low (high). We further verify this channel using capital flows and cross-state longevity variations.

Keywords: momentum; stock duration; longevity risk; pensions; life insurers

JEL Classification: G11, G12, G22, H55, J11, J32

Suggested Citation

Chen, Zhanhui and Lou, Pingyi and Zhu, Wenjun, Duration-Hedging Trades, Return Momentum and Reversal (December 1, 2019). Nanyang Business School Research Paper No. 20-27, Available at SSRN: https://ssrn.com/abstract=3529116 or http://dx.doi.org/10.2139/ssrn.3529116

Zhanhui Chen (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

Pingyi Lou

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Wenjun Zhu

Nanyang Business School, Nanyang Technological University ( email )

50 Nanyang Avenue
Singapore, 639798
Singapore
(65) 6592-1859 (Phone)

HOME PAGE: http://sites.google.com/view/wenjun-zhu

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