Exploring Hedging Strategies Identified by Fractal Dimensions

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.