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

Authors

Elisson Andrade, University of Sao PauloFollow
Fabio Mattos, University of Nebraska-LincolnFollow
Roberto Arruda de Souza Lima, University of Sao PauloFollow

Document Type

Article

Date of this Version

2018

Citation

Risks 2018, 6, 118

Comments

© 2018 by the authors.

Open access

doi:10.3390/risks6040118

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.