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New Insights on Hedge Ratios in the Presence of Stochastic Transaction Costs

Author

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  • Elisson Andrade

    (Department of Ecomics, Administration and Sociology, University of São Paulo, Piracicaba, SP 13418-900, Brazil)

  • Fabio Mattos

    (Deparment of Aricultural Economics, University of Nebraska-Lincoln, Lincoln, NE 68583-0922, USA)

  • Roberto Arruda de Souza Lima

    (Department of Ecomics, Administration and Sociology, University of São Paulo, Piracicaba, SP 13418-900, Brazil)

Abstract

The objective of this research is to evaluate the influence on hedging decisions of a realistic set of transaction costs which are largely stochastic. The stochastic nature of some transaction costs (such as margin calls) means that their exact value is unknown when the hedge is placed, since they depend on the trajectory of futures prices during the hedge. Results are consistent with previous studies in that the introduction of transaction costs tend to affect hedge ratios. However, as opposed to the traditional literature, the introduction of stochastic costs in futures hedging can either decrease or increase hedge ratios depending on how these costs are determined.

Suggested Citation

  • 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.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:4:p:118-:d:174853
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    References listed on IDEAS

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