Optimal hedge ratio estimation and effectiveness using ARCD

Kostika, Eleftheria and Markellos, Raphael-Nicholas (2012) Optimal hedge ratio estimation and effectiveness using ARCD. Journal of Forecasting, 32 (1). pp. 41-50. ISSN 0277-6693

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Abstract

This paper examines the importance of higher moments for optimal hedge ratio estimation by using Autoregressive Conditional Density (ARCD) models which allow for time varying skewness and kurtosis. The performance of ARCD is evaluated against that of conventional hedge ratio estimation methodologies based on OLS, error-correction, exponentially weighted moving averages, and, univariate and multivariate GARCH, respectively. An empirical application using spot and futures data on the DJI, FTSE and DAX indices, compares the in-sample and out-of-sample hedging effectiveness of each approach in terms of risk minimization. The results show that the ARCD has the best performance thus suggesting that higher moments are of practical importance in futures hedging.

Item Type:	Article
Faculty \ School:	Faculty of Social Sciences > Norwich Business School
UEA Research Groups:	Faculty of Social Sciences > Research Groups > Finance Group Faculty of Social Sciences > Research Centres > Centre for Competition Policy
Depositing User:	Raphael Markellos
Date Deposited:	21 Feb 2012 09:20
Last Modified:	23 Apr 2024 14:30
URI:	https://ueaeprints.uea.ac.uk/id/eprint/37266
DOI:	10.1002/for.1249

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