Journal of Risk

Hedging: scaling and the investor horizon

John Cotter, Jim Hanly


This paper examines the volatility and covariance dynamics of cash and futures contracts that underlie the optimal hedge ratio across different hedging time horizons. We examine whether hedge ratios calculated over a short-term hedging horizon can be scaled and successfully applied to longer-term horizons. We also test the equivalence of scaled hedge ratios with those calculated directly from lower-frequency data and compare them in terms of hedging effectiveness. Our findings show that the volatility and covariance dynamics may differ considerably depending on the hedging horizon, and this gives rise to significant differences between short-term and longer-term hedges. Despite this, scaling provides good hedging outcomes in terms of risk reduction that are comparable to those based on direct estimation.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here