Hedging: Scaling and the Investor Horizon

John Cotter and Jim Hanly ()

Papers from arXiv.org

Abstract: This paper examines the volatility and covariance dynamics of cash and futures contracts that underlie the Optimal Hedge Ratio (OHR) across different hedging time horizons. We examine whether hedge ratios calculated over a short term hedging horizon can be scaled and successfully applied to longer term horizons. We also test the equivalence of scaled hedge ratios with those calculated directly from lower frequency data and compare them in terms of hedging effectiveness. Our findings show that the volatility and covariance dynamics may differ considerably depending on the hedging horizon and this gives rise to significant differences between short term and longer term hedges. Despite this, scaling provides good hedging outcomes in terms of risk reduction which are comparable to those based on direct estimation.

Date: 2011-03
New Economics Papers: this item is included in nep-rmg
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http://arxiv.org/pdf/1103.5966 Latest version (application/pdf)

Related works:
Working Paper: Hedging: Scaling and the Investor Horizon (2010)
Journal Article: Hedging: scaling and the investor horizon
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1103.5966

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