Hedging : scaling and the investor horizon

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Title: Hedging : scaling and the investor horizon
Authors: Cotter, John
Hanly, Jim
Permanent link: http://hdl.handle.net/10197/2597
Date: Aug-2009
Online since: 2010-11-25T16:18:36Z
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.
Funding Details: Not applicable
Type of material: Working Paper
Publisher: University College Dublin. School of Business. Centre for Financial Markets
University College Dublin. Geary Institute
Series/Report no.: Centre for Financial Markets working paper series; WP 09 06; UCD Geary Institute Discussion Paper Series; WP 10 02
Keywords: Hedging effectiveness;ScalingVolatility modellingForecasting
Subject LCSH: Hedging (Finance)--Evaluation
International finance
Other versions: http://www.ucd.ie/bankingfinance/docs/wp/WP-O9-06-cotter-hanly-hedging.pdf
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Geary Institute Working Papers
Centre for Financial Markets Working Papers

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