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Hedging index exchange traded funds

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  • Alexander, C.
  • Barbosa, A.

Abstract

This paper presents an empirical comparison of the out of sample hedging performance from naïve and minimum variance hedge ratios for the four largest US index exchange traded funds (ETFs). Efficient hedging is important to offset long and short positions on market maker's accounts, particularly imbalances in net creation or redemption demands around the time of dividend payments. Our evaluation of out of sample hedging performance includes aversion to negative skewness and excess kurtosis. The results should be of interest to hedge funds employing tax arbitrage or leveraged long-short equity strategies as well as to ETF market makers.

Suggested Citation

  • Alexander, C. & Barbosa, A., 2008. "Hedging index exchange traded funds," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 326-337, February.
  • Handle: RePEc:eee:jbfina:v:32:y:2008:i:2:p:326-337
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    References listed on IDEAS

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    Cited by:

    1. Liu, Hung-Chun & Chiang, Shu-Mei & Cheng, Nick Ying-Pin, 2012. "Forecasting the volatility of S&P depositary receipts using GARCH-type models under intraday range-based and return-based proxy measures," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 78-91.
    2. repec:eee:ecofin:v:42:y:2017:i:c:p:285-299 is not listed on IDEAS
    3. Tim Leung & Brian Ward, 2015. "The golden target: analyzing the tracking performance of leveraged gold ETFs," Studies in Economics and Finance, Emerald Group Publishing, vol. 32(3), pages 278-297, August.
    4. Chau, Frankie & Deesomsak, Rataporn & Lau, Marco C.K., 2011. "Investor sentiment and feedback trading: Evidence from the exchange-traded fund markets," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 292-305.
    5. Mikica Drenovak & Branko Urošević, 2010. "Exchange-Traded Funds Of The Euro Zone Sovereign Debt," Economic Annals, Faculty of Economics, University of Belgrade, vol. 55(187), pages 31-60, October –.
    6. Lyudmila A. Glik & Oleg L. Kritski, 2014. "Finding informed traders in futures and their inderlying assets in intraday trading," Papers 1402.6583, arXiv.org.
    7. Tim Leung & Brian Ward, 2017. "Dynamic Index Tracking and Risk Exposure Control Using Derivatives," Papers 1705.10454, arXiv.org.
    8. Mahmod Qadan & Joseph Yagil, 2012. "On the dynamics of tracking indices by exchange traded funds in the presence of high volatility," Managerial Finance, Emerald Group Publishing, vol. 38(9), pages 804-832, August.
    9. Emilio Ricardo Carvalhais & Antonio Marcos Duarte Júnior, 2015. "Indexation of Fixed-Income Portfolios to the IMA-B," Brazilian Business Review, Fucape Business School, vol. 12(3), pages 116-142, May.
    10. Pan, Zhiyuan & Wang, Yudong & Yang, Li, 2014. "Hedging crude oil using refined product: A regime switching asymmetric DCC approach," Energy Economics, Elsevier, vol. 46(C), pages 472-484.
    11. Omid Sabbaghi, 2011. "The behavior of green exchange-traded funds," Managerial Finance, Emerald Group Publishing, vol. 37(5), pages 426-441, April.
    12. Kearney, Fearghal & Cummins, Mark & Murphy, Finbarr, 2014. "Outperformance in exchange-traded fund pricing deviations: Generalized control of data snooping bias," Journal of Financial Markets, Elsevier, vol. 19(C), pages 86-109.
    13. Lee, Hsiang-Tai, 2010. "Regime switching correlation hedging," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2728-2741, November.

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