Fractal Dimension Option Hedging Strategy Implementation During Turbulent Market Conditions in Developing and Developed Countries

L.J. Basson, Sune Ferreira-Schenk and Zandri Dickason-Koekemoer
Additional contact information
L.J. Basson: Postgraduate student, Department of Risk Management, North-West University, Vaal Campus, South Africa
Sune Ferreira-Schenk: Programme leader, Department of Risk Management, North-West University, Vaal Campus, South Africa
Zandri Dickason-Koekemoer: TRADE research entity director, North-West University, South Africa

International Journal of Economics and Financial Issues, 2022, vol. 12, issue 2, 84-95

Abstract: A hedging strategy is designed to increase the likelihood of desired financial outcomes. Market speculators hedge investment positions if they are worth protecting against potential negative outcomes of turbulent market conditions and effective hedging implementation can reduce the impact severity on the underlying investment since these negative scenarios cannot be avoided. This paper provides a solution for investors to implement a trading strategy to effectively manage turbulent market conditions (such as the COVID pandemic) by implementing an investment trading approach. The investment strategy includes an index held by the investor (long position) and uses a fractal dimension indicator to warn when liquidity or sentiment changes are imminent within financial markets. When the threshold is breached at a predetermined level, the investor will take this observation as a change in liquidity in the market and a hedging position is undertaken. This sequence of events triggers the implementation of a hedging strategy by entering a buy put option position. The fractal indicator was found to be effective when applied to four of the six tested indices in terms of cumulative returns, but also in effect increased the risk taken by the investor for all six indices. The conclusion was made that where the outcome was similar for each economy type, both had a scenario where two out of the three economies outperformed the underlying index and had one index not outperforming the underlying index. This comparison was done to establish whether the hedging strategy had a more promising application to a developing or developed economy type. The fractal indicator was found to be effective when applied to four of the six tested indices in terms of cumulative returns, but also in effect increased the risk taken by the investor for all six indices.

Keywords: Fractal market hypothesis; hedging strategy; trading strategy; market volatility; Covid-19 (search for similar items in EconPapers)
JEL-codes: D53 D81 O16 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econjournals.com/index.php/ijefi/article/download/12976/6697 (application/pdf)
https://www.econjournals.com/index.php/ijefi/article/view/12976 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eco:journ1:2022-02-9

Access Statistics for this article

International Journal of Economics and Financial Issues is currently edited by Ilhan Ozturk

More articles in International Journal of Economics and Financial Issues from Econjournals
Bibliographic data for series maintained by Ilhan Ozturk ().