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The effect of the rebalancing horizon on the tradeoff between hedging effectiveness and transaction costs

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  • Jitmaneeroj, Boonlert

Abstract

This paper examines the impact of the rebalancing horizon on the transaction costs per hedging effectiveness (TC/HE ratio) for dynamic hedging of the S&P 500 index with 21 commodity indices. This paper produces new evidence that as the rebalancing horizon lengthens, the TC/HE ratio exhibits a monotonically decreasing relationship with positive convexity. This asymmetric effect suggests that hedgers pay more attention to reductions rather than increases in the rebalancing horizons and hedging strategies at short rather than long rebalancing horizons. Although commodities can be used to hedge equity portfolios, they should be used with caution given their low hedging effectiveness.

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  • Jitmaneeroj, Boonlert, 2018. "The effect of the rebalancing horizon on the tradeoff between hedging effectiveness and transaction costs," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 282-298.
    • Handle: RePEc:eee:reveco:v:58:y:2018:i:c:p:282-298
    DOI: 10.1016/j.iref.2018.03.027
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    Cited by:

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    2. Long Hai Vo & Duc Hong Vo, 2020. "Modelling Australian Dollar Volatility at Multiple Horizons with High-Frequency Data," Risks, MDPI, vol. 8(3), pages 1-16, August.
    3. Benjamin Cheng & Christina Sklibosios Nikitopoulos & Erik Schlögl, 2019. "Interest rate risk in long‐dated commodity options positions: To hedge or not to hedge?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(1), pages 109-127, January.
    4. Elisson Andrade & Fabio Mattos & Roberto Arruda de Souza Lima, 2018. "New Insights on Hedge Ratios in the Presence of Stochastic Transaction Costs," Risks, MDPI, vol. 6(4), pages 1-15, October.

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    More about this item

    Keywords

    Hedge ratio; Hedging effectiveness; Transaction cost; Rebalancing horizon; Hedging horizon; C32; G11; G13; Q02;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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