Hedging strategies for U.S. factor and sector exchange-traded funds during geopolitical events

SeungOh Han

Finance Research Letters, 2024, vol. 65, issue C

Abstract: Employing TVP-VAR analysis, this study examines risk transmission between factor and sector ETFs during the Russia–Ukraine and Israel–Hamas conflicts. We then identify effective post-conflict hedging strategies. Our analysis reveals a moderate post-conflict increase in ETF interconnectedness, suggesting heightened interdependence during geopolitical turmoil. Size, quality, and momentum factors serve as the main post-conflict risk transmitters, while the energy and basic materials sectors become the main recipients. Notably, the energy sector emerges as the most cost-effective post-conflict hedge. Additionally, size and quality factors demonstrate significant effectiveness in mitigating risk, while the communications sector shows a notable post-conflict improvement in hedging effectiveness.

Keywords: Geopolitical conflicts; Exchange-traded funds; Factor and sector ETFs; Risk spillovers; Hedging strategies (search for similar items in EconPapers)
JEL-codes: C32 G11 G12 N44 N45 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:65:y:2024:i:c:s1544612324005324

DOI: 10.1016/j.frl.2024.105502

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