Document Type
Article
Rights
This item is available under a Creative Commons License for non-commercial use only
Disciplines
Economics, Econometrics
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.
DOI
https://doi.org/10.21427/D7JB6W
Recommended Citation
Hanly, J. Cotter, J.: Hedging: Scaling and the Investor Horizon. Journal of Risk 12 49-77.
Included in
Finance and Financial Management Commons, Management Sciences and Quantitative Methods Commons, Portfolio and Security Analysis Commons
Publication Details
Journal of Risk 12 49-77