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On the Measurement of Hedging Effectiveness for Long-Term Investment Guarantees

Author

Listed:
  • Maciej Augustyniak

    (Département de Mathématiques et de Statistique, Université de Montréal, P.O. Box 6128, Station Centre-Ville, Montreal, QC H3C 3J7, Canada
    Quantact Actuarial and Financial Mathematics Laboratory, Centre de Recherches Mathématiques, Université de Montréal, P.O. Box 6128, Station Centre-Ville, Montreal, QC H3C 3J7, Canada)

  • Alexandru Badescu

    (Department of Mathematics and Statistics, University of Calgary, 2500 University Drive NW, Calgary, AB T2N 1N4, Canada)

  • Mathieu Boudreault

    (Quantact Actuarial and Financial Mathematics Laboratory, Centre de Recherches Mathématiques, Université de Montréal, P.O. Box 6128, Station Centre-Ville, Montreal, QC H3C 3J7, Canada
    Département de Mathématiques, Université du Québec à Montréal, P.O. Box 8888, Station Centre-Ville, Montreal, QC H3C 3P8, Canada)

Abstract

Although the finance literature has devoted a lot of research into the development of advanced models for improving the pricing and hedging performance, there has been much less emphasis on approaches to measure dynamic hedging effectiveness. This article discusses a statistical framework based on regression analysis to measure the effectiveness of dynamic hedges for long-term investment guarantees. The importance of taking model risk into account is emphasized. The difficulties in reducing hedging risk to an appropriately low level lead us to propose a new perspective on hedging, and recognize it as a tool to modify the risk–reward relationship of the unhedged position.

Suggested Citation

  • Maciej Augustyniak & Alexandru Badescu & Mathieu Boudreault, 2023. "On the Measurement of Hedging Effectiveness for Long-Term Investment Guarantees," JRFM, MDPI, vol. 16(2), pages 1-18, February.
    • Handle: RePEc:gam:jjrfmx:v:16:y:2023:i:2:p:112-:d:1065025
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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