Hedging: Scaling and the Investor Horizon

44 Pages Posted: 4 Dec 2009

See all articles by John Cotter

John Cotter

University College Dublin; University of California, Los Angeles (UCLA) - Anderson School of Management

Jim Hanly

Technological University Dublin

Date Written: December 2, 2009

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.

Keywords: Hedging Effectiveness, Scaling, Volatility Modelling, Forecasting

JEL Classification: G1, G12, G15

Suggested Citation

Cotter, John and Hanly, Jim, Hedging: Scaling and the Investor Horizon (December 2, 2009). Available at SSRN: https://ssrn.com/abstract=1517115 or http://dx.doi.org/10.2139/ssrn.1517115

John Cotter (Contact Author)

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
Ireland
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/professorjohncotter/

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Jim Hanly

Technological University Dublin ( email )

Dublin
Ireland
+35314023180 (Phone)

HOME PAGE: http://www.jimhanly.com

Register to save articles to
your library

Register

Paper statistics

Downloads
99
Abstract Views
650
rank
271,378
PlumX Metrics