Economic evaluation of dynamic hedging strategies using high-frequency data

Yu-Sheng Lai

Finance Research Letters, 2023, vol. 57, issue C

Abstract: This paper assesses the value of volatility timing when high-frequency data are available for measuring the realized hedged portfolio variance. We derive an analytical solution to estimate the performance fee for switching from static to dynamic generalized autoregressive conditional heteroskedasticity (GARCH) strategies. We find that the benefits depend on the realized hedged portfolio variances and the risk aversion level of the hedger. We use data from US equity indices to demonstrate that the switching can benefit hedgers, even after the transaction costs are accounted for. Hedgers with higher levels of risk aversion can benefit more from implementing the volatility-timing strategy.

Keywords: Economic evaluation; Covariance forecasts; Futures hedge ratio; Hedging effectiveness; High-frequency data (search for similar items in EconPapers)
JEL-codes: C32 C52 G11 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:57:y:2023:i:c:s1544612323006025

DOI: 10.1016/j.frl.2023.104230

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