Financial risk management: dynamic versus static hedging

Gregory Koutmos

Global Business and Economics Review, 1999, vol. 1, issue 1, 60-75

Abstract: Despite the growing evidence that speculative assets have time-varying variances and covariances, risk management techniques have not exploited this potentially useful property. This article proposes a dynamic risk management (hedging) model that takes advantage of time dependencies present in the joint distribution of the returns of spot assets and futures contracts. The hedging effectiveness of the dynamic model is compared to that of the static model. There is clear evidence that dynamic hedging is superior to static hedging in terms of both total variance reduction and expected utility maximisation. These results hold even when transactions costs are incorporated into the analysis.

Keywords: financial risk management; dynamic hedging; static hedging; time dependencies; spot assets; futures contracts. (search for similar items in EconPapers)
Date: 1999
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