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Hedging strategies for U.S. factor and sector exchange-traded funds during geopolitical events

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  • Han, SeungOh

Abstract

Employing TVP-VAR analysis, this study examines risk transmission between factor and sector ETFs during the Russia–Ukraine and Israel–Hamas conflicts. We then identify effective post-conflict hedging strategies. Our analysis reveals a moderate post-conflict increase in ETF interconnectedness, suggesting heightened interdependence during geopolitical turmoil. Size, quality, and momentum factors serve as the main post-conflict risk transmitters, while the energy and basic materials sectors become the main recipients. Notably, the energy sector emerges as the most cost-effective post-conflict hedge. Additionally, size and quality factors demonstrate significant effectiveness in mitigating risk, while the communications sector shows a notable post-conflict improvement in hedging effectiveness.

Suggested Citation

  • Han, SeungOh, 2024. "Hedging strategies for U.S. factor and sector exchange-traded funds during geopolitical events," Finance Research Letters, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:finlet:v:65:y:2024:i:c:s1544612324005324
    DOI: 10.1016/j.frl.2024.105502
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    More about this item

    Keywords

    Geopolitical conflicts; Exchange-traded funds; Factor and sector ETFs; Risk spillovers; Hedging strategies;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • N44 - Economic History - - Government, War, Law, International Relations, and Regulation - - - Europe: 1913-
    • N45 - Economic History - - Government, War, Law, International Relations, and Regulation - - - Asia including Middle East

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