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The Impact of Jumps and Thin Trading on Realsied Hedge Ratios

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The use of intradaily data to produce daily variance measures has resulted in increased forecast accuracy and better hedging for many markets. However, this paper shows that improved hedging ratios can depend on the behaviour of price disruptions in the assets. When the spot and future prices for the same asset do not jump simultaneously within the day, then inferior hedging outcomes can be observed. We illustrate that this problem dominates bias from potential thin trading. Using US Treasury data we demonstrate how the extent of non-synchronised jumping, or disjoint jumping, leads to the finding that optimal hedging ratios are not improved with high frequency data in this market.

This talk is part of the Cambridge Finance Workshop Series series.

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