Optimal hedging ratio modeling using interday and intraday risk estimation: Moving window regression vs. cointegration approach

Article type: Research Article

Authors: Penikas, Henry^* | Sirotkin, Igor

Affiliations: National Research University Higher School of Economics, Moscow, Russia

Correspondence: [*] Corresponding author: Henry Penikas, Department of Applied Economics, International Laboratory of Decision Choice and Analysis, 26, Shabolovka, Moscow, 119049, Russia, Tel.: +7 495 772 95 90; E-mail:[email protected]

Abstract: We considered the problem of choosing optimal hedging ratio taking into account interday and intraday return decomposition. It was shown that the standard hedging approach which uses only close prices (i.e. daily returns) is inefficient in comparison with hedging strategy based on open and close prices, i.e. when differentiating hedging ratio for interday and intraday periods. Results are confirmed both by applying Moving Window Regression and Error Correction Model for major world indexes for 1992-2012.

Keywords: Hedging, hedging ratio, interday risk, intraday risk, moving window regression, structural breaks, ECM

DOI: 10.3233/MAS-150353

Journal: Model Assisted Statistics and Applications, vol. 11, no. 1, pp. 59-70, 2016