Dynamic optimal hedge ratios: Evidence from Asian stock futures markets
(2011) NEKM03 20111Department of Economics
- Abstract
- In this thesis, two multivariate conditional volatility models are applied to evaluate the performance of optimal hedge ratios (OHRs) in minimizing the exposure from holding positions in the underlying stock markets. The OHRs were calculated for four distinct strategies: i) a “static” hedge ratio obtained by constant OLS; ii) a rolling OLS hedge; iii) a dynamic hedge based on a constant conditional correlation GARCH model; and iv) a dynamic hedge based on a dynamic conditional correlation GARCH. There is no evidence that the hedging strategies based on CCC or DCC GARCH have any significant advantages in terms of risk reduction compared with conventional OLS hedges. The empirical results suggest that the multivariate conditional volatility... (More)
- In this thesis, two multivariate conditional volatility models are applied to evaluate the performance of optimal hedge ratios (OHRs) in minimizing the exposure from holding positions in the underlying stock markets. The OHRs were calculated for four distinct strategies: i) a “static” hedge ratio obtained by constant OLS; ii) a rolling OLS hedge; iii) a dynamic hedge based on a constant conditional correlation GARCH model; and iv) a dynamic hedge based on a dynamic conditional correlation GARCH. There is no evidence that the hedging strategies based on CCC or DCC GARCH have any significant advantages in terms of risk reduction compared with conventional OLS hedges. The empirical results suggest that the multivariate conditional volatility model, which involves extra cost, may, in some cases, fail to improve hedging performance. One possible explanation is that the forecasts generated by the MGARCH models are too volatile. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/1895444
- author
- Wang, Zixiang LU
- supervisor
- organization
- course
- NEKM03 20111
- year
- 2011
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Optimal Hedge Ratio, Multivariate GARCH model, Stock Index Futures
- language
- English
- id
- 1895444
- date added to LUP
- 2011-05-18 14:40:12
- date last changed
- 2011-05-18 14:40:12
@misc{1895444, abstract = {{In this thesis, two multivariate conditional volatility models are applied to evaluate the performance of optimal hedge ratios (OHRs) in minimizing the exposure from holding positions in the underlying stock markets. The OHRs were calculated for four distinct strategies: i) a “static” hedge ratio obtained by constant OLS; ii) a rolling OLS hedge; iii) a dynamic hedge based on a constant conditional correlation GARCH model; and iv) a dynamic hedge based on a dynamic conditional correlation GARCH. There is no evidence that the hedging strategies based on CCC or DCC GARCH have any significant advantages in terms of risk reduction compared with conventional OLS hedges. The empirical results suggest that the multivariate conditional volatility model, which involves extra cost, may, in some cases, fail to improve hedging performance. One possible explanation is that the forecasts generated by the MGARCH models are too volatile.}}, author = {{Wang, Zixiang}}, language = {{eng}}, note = {{Student Paper}}, title = {{Dynamic optimal hedge ratios: Evidence from Asian stock futures markets}}, year = {{2011}}, }