Hedging performance of multiscale hedge ratios |
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| Authors: | Jahangir Sultan Antonios K Alexandridis Mohammad Hasan Xuxi Guo |
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| Institution: | 1. Department of Finance, Bentley University, Waltham, Massachusetts;2. Finance group, Kent Business School, University of Kent, Canterbury, Kent, UK;3. Department of Finance, Georgia State University, Atlanta, Georgia |
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| Abstract: | In this study, the wavelet multiscale model is applied to selected assets to hedge time-dependent exposure of an agent with a preference for a certain hedging horizon. Based on the in-sample and out-of-sample portfolio variances, the wavelet-based generalized autoregressive conditional heteroskedasticity (GARCH) model produces the lowest variances. From a utility standpoint, wavelet networks combined with GARCH have the highest utility. Finally, the wavelet-GARCH model has the lowest minimum capital risk requirements. Overall, the wavelet GARCH and wavelet networks offer improvements over traditional hedging models. |
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| Keywords: | GARCH model hedging effectiveness multiscale hedge ratio wavelet analysis wavelet networks |
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