TY - JOUR
T1 - The opportunity cost of hedging under incomplete information
T2 - Evidence from ETF/Ns
AU - Cui, Zhenyu
AU - Simaan, Majeed
N1 - Publisher Copyright:
© 2021 Wiley Periodicals LLC
PY - 2021/11
Y1 - 2021/11
N2 - This paper considers the optimal hedge ratio problem under estimation risk. Due to incomplete information, the decision-maker evaluates the opportunity cost of hedging using exchange-traded funds or notes (ETF/Ns). Using a backtesting procedure over the last 5 years and 13 different hedging instruments—both inverse-equity ETFs and volatility ETNs—we quantify the proposed opportunity cost using different out-of-sample performance metrics. Given the greater accessibility of commission-free brokers for small investors along with the popularity of ETF/Ns, our paper appeals to retail investors and provides guidance in terms of choosing the optimal hedge ratio under estimation risk.
AB - This paper considers the optimal hedge ratio problem under estimation risk. Due to incomplete information, the decision-maker evaluates the opportunity cost of hedging using exchange-traded funds or notes (ETF/Ns). Using a backtesting procedure over the last 5 years and 13 different hedging instruments—both inverse-equity ETFs and volatility ETNs—we quantify the proposed opportunity cost using different out-of-sample performance metrics. Given the greater accessibility of commission-free brokers for small investors along with the popularity of ETF/Ns, our paper appeals to retail investors and provides guidance in terms of choosing the optimal hedge ratio under estimation risk.
KW - Robinhood
KW - inverse ETFs
KW - parameter uncertainty
KW - portfolio hedge
KW - retail investors
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U2 - 10.1002/fut.22252
DO - 10.1002/fut.22252
M3 - Article
AN - SCOPUS:85111544577
SN - 0270-7314
VL - 41
SP - 1775
EP - 1796
JO - Journal of Futures Markets
JF - Journal of Futures Markets
IS - 11
ER -