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Financial risk management: dynamic versus static hedging

Author

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  • Gregory Koutmos

Abstract

Despite the growing evidence that speculative assets have time-varying variances and covariances, risk management techniques have not exploited this potentially useful property. This article proposes a dynamic risk management (hedging) model that takes advantage of time dependencies present in the joint distribution of the returns of spot assets and futures contracts. The hedging effectiveness of the dynamic model is compared to that of the static model. There is clear evidence that dynamic hedging is superior to static hedging in terms of both total variance reduction and expected utility maximisation. These results hold even when transactions costs are incorporated into the analysis.

Suggested Citation

  • Gregory Koutmos, 1999. "Financial risk management: dynamic versus static hedging," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 1(1), pages 60-75.
    • Handle: RePEc:ids:gbusec:v:1:y:1999:i:1:p:60-75
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    Cited by:

    1. Claude Bardos & Raphaël Douady & Andrei Fursikov, 2002. "Static Hedging Of Barrier Options With A Smile: An Inverse Problem," Post-Print hal-01477102, HAL.

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