The impact of jumps and thin trading on realized hedge ratios

Mardi Dungey, Ólan Henry and Lyudmyla Hvodzdyk
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Lyudmyla Hvodzdyk: School of Economics and Finance, University of Tasmania

No 2013-02, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

Abstract: The use of intradaily data to produce daily variance measures has resulted in increased forecast accuracy and better hedging for many markets. However, this paper shows that improved hedging ratios can depend on the behavior of price disruptions in the assets. When spot and future prices for the same asset do not jump simultaneously inferior hedging outcomes can be observed. This problem dominates potential bias from thin trading. Using US Treasury data we demonstrate how the extent of non-synchronized jumping leads to the ?nding that optimal hedging ratios are not improved with intradaily data in this market.

Keywords: US US Treasury bonds; Futures; Realized hedge ratios; Jumps; Thin trading (search for similar items in EconPapers)
JEL-codes: C01 C32 G11 G17 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2013-03-28, Revised 2013-03-28
New Economics Papers: this item is included in nep-for and nep-mst
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Published by the University of Tasmania. Discussion paper 2013-02

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