New Insights on Hedge Ratios in the Presence of Stochastic Transaction Costs

Elisson Andrade, Fabio Mattos and Roberto Arruda de Souza Lima
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Elisson Andrade: Department of Ecomics, Administration and Sociology, University of São Paulo, Piracicaba, SP 13418-900, Brazil
Roberto Arruda de Souza Lima: Department of Ecomics, Administration and Sociology, University of São Paulo, Piracicaba, SP 13418-900, Brazil

Risks, 2018, vol. 6, issue 4, 1-15

Abstract: The objective of this research is to evaluate the influence on hedging decisions of a realistic set of transaction costs which are largely stochastic. The stochastic nature of some transaction costs (such as margin calls) means that their exact value is unknown when the hedge is placed, since they depend on the trajectory of futures prices during the hedge. Results are consistent with previous studies in that the introduction of transaction costs tend to affect hedge ratios. However, as opposed to the traditional literature, the introduction of stochastic costs in futures hedging can either decrease or increase hedge ratios depending on how these costs are determined.

Keywords: transaction costs; optimal hedge ratio; uncertainty (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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