Abstract
This paper assesses the value of volatility timing when high-frequency data are available for measuring the realized hedged portfolio variance. We derive an analytical solution to estimate the performance fee for switching from static to dynamic generalized autoregressive conditional heteroskedasticity (GARCH) strategies. We find that the benefits depend on the realized hedged portfolio variances and the risk aversion level of the hedger. We use data from US equity indices to demonstrate that the switching can benefit hedgers, even after the transaction costs are accounted for. Hedgers with higher levels of risk aversion can benefit more from implementing the volatility-timing strategy.
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