Exploring Hedging Strategies Identified by Fractal Dimensions

Authors

  • Lodewikus Jacobus Basson
  • Gary van Vuuren

DOI:

https://doi.org/10.47743/saeb-2020-0005

Keywords:

fractal market hypothesis, hedging strategy, trading strategy

Abstract

A hedging strategy is designed to increase the likelihood of desired financial out-comes. Market speculators hedge investment positions if they are worth protecting against potential negative outcomes on the underlying investment. Such negative outcomes cannot be avoided altogether, but effective hedging can reduce impact severity. The investment strategy includes an index held by investors (long position) and uses a fractal dimension indicator to warn when liquidity or sentiment changes are imminent. When the named indicator breaches a certain threshold, a hedging position is taken. This sequence of events triggers the implementation of a hedging strategy by entering a buy put-option position. The daily cumulative returns on using the fractal dimension indicators were 83% more profitable on average when applied to each chosen index respectively.

JEL Codes - C52; G11

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Published

2020-03-28

How to Cite

Basson, L. J., & van Vuuren, G. (2020). Exploring Hedging Strategies Identified by Fractal Dimensions. Scientific Annals of Economics and Business, 67(1), 1–13. https://doi.org/10.47743/saeb-2020-0005

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