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An empirical analysis of dynamic multiscale hedging using wavelet decomposition
Author(s)
Date Issued
2011-03-07
Date Available
2011-09-27T15:56:37Z
Abstract
This paper investigates the hedging effectiveness of a dynamic moving window OLS hedging model, formed
using wavelet decomposed time-series. The wavelet transform is applied to calculate the appropriate dynamic
minimum-variance hedge ratio for various hedging horizons for a number of assets. The effectiveness of the
dynamic multiscale hedging strategy is then tested, both in-and out-of-sample, using standard variance reduction
and expanded to include a downside risk metric, the time horizon dependent Value-at-Risk. Measured using
variance reduction, the effectiveness converges to one at longer scales, while a measure of VaR reduction indicates
a portion of residual risk remains at all scales. Analysis of the hedge portfolio distributions indicate that this
unhedged tail risk is related to excess portfolio kurtosis found at all scales.
Sponsorship
Science Foundation Ireland
Type of Material
Journal Article
Publisher
Wiley-Blackwell
Journal
Journal of Futures Markets
Volume
[forthcoming]
Copyright (Published Version)
2011 Wiley Periodicals, Inc.
Subject – LCSH
Hedging (Finance)--Mathematical models
Wavelets (Mathematics)
Decomposition (Mathematics)
Web versions
Language
English
Status of Item
Peer reviewed
This item is made available under a Creative Commons License
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