Dynamic hedging with futures: A copula-based GARCH model
Journal
Journal of Futures Markets
Journal Volume
28
Journal Issue
11
Pages
1095-1116
Date Issued
2008
Author(s)
Abstract
In a number of earlier studies it has been demonstrated that the traditional regression-based static approach is inappropriate for hedging with futures, with the result that a variety of alternative dynamic hedging strategies have emerged. In this study the authors propose a class of new copula-based GARCH models for the estimation of the optimal hedge ratio and compare their effectiveness with that of other hedging models, including the conventional static, the constant conditional correlation (CCC) GARCH, and the dynamic conditional correlation (DCC) GARCH models. With regard to the reduction of variance in the returns of hedged portfolios, the empirical results show that in both the in-sample and out-of-sample tests, with full flexibility in the distribution specifications, the copula-based GARCH models perform more effectively than other dynamic hedging models. ? 2008 Wiley Periodicals, Inc.
Type
journal article