Type

Journal Article

Authors

John Cotter
Thomas Conlon

Subjects

Business

Topics
decomposition analysis hedging finance mathematical models dynamic multiscale hedging decomposition mathematics wavelets mathematics value at risk dynamic analysis wavelet decomposition

An empirical analysis of dynamic multiscale hedging using wavelet decomposition (2011)

Abstract This paper investigates the hedging effectiveness of a dynamic moving window OLS hedging model, formedusing wavelet decomposed time-series. The wavelet transform is applied to calculate the appropriate dynamicminimum-variance hedge ratio for various hedging horizons for a number of assets. The effectiveness of thedynamic multiscale hedging strategy is then tested, both in-and out-of-sample, using standard variance reductionand expanded to include a downside risk metric, the time horizon dependent Value-at-Risk. Measured usingvariance reduction, the effectiveness converges to one at longer scales, while a measure of VaR reduction indicatesa portion of residual risk remains at all scales. Analysis of the hedge portfolio distributions indicate that thisunhedged tail risk is related to excess portfolio kurtosis found at all scales.
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Ireland -> University College Dublin -> Business Research Collection
Ireland -> University College Dublin -> Institutes and Centres
Ireland -> University College Dublin -> School of Business
Ireland -> University College Dublin -> Financial Mathematics Computation Cluster
Ireland -> University College Dublin -> FMC² Research Collection
Ireland -> University College Dublin -> Complex and Adaptive Systems Laboratory
Ireland -> University College Dublin -> College of Business

Full list of authors on original publication

John Cotter, Thomas Conlon

Experts in our system

1
John Cotter
University College Dublin
Total Publications: 93
 
2
Thomas Conlon
University College Dublin
Total Publications: 9