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Economic evaluation of dynamic hedging strategies using high-frequency data

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  • Lai, Yu-Sheng

Abstract

This paper assesses the value of volatility timing when high-frequency data are available for measuring the realized hedged portfolio variance. We derive an analytical solution to estimate the performance fee for switching from static to dynamic generalized autoregressive conditional heteroskedasticity (GARCH) strategies. We find that the benefits depend on the realized hedged portfolio variances and the risk aversion level of the hedger. We use data from US equity indices to demonstrate that the switching can benefit hedgers, even after the transaction costs are accounted for. Hedgers with higher levels of risk aversion can benefit more from implementing the volatility-timing strategy.

Suggested Citation

  • Lai, Yu-Sheng, 2023. "Economic evaluation of dynamic hedging strategies using high-frequency data," Finance Research Letters, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:finlet:v:57:y:2023:i:c:s1544612323006025
    DOI: 10.1016/j.frl.2023.104230
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    References listed on IDEAS

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    More about this item

    Keywords

    Economic evaluation; Covariance forecasts; Futures hedge ratio; Hedging effectiveness; High-frequency data;
    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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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