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Dynamic optimal hedge ratios: Evidence from Asian stock futures markets

Wang, Zixiang LU (2011) NEKM03 20111
Department 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:
author
Wang, Zixiang LU
supervisor
organization
course
NEKM03 20111
year
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},
  keyword      = {Optimal Hedge Ratio,Multivariate GARCH model,Stock Index Futures},
  language     = {eng},
  note         = {Student Paper},
  title        = {Dynamic optimal hedge ratios: Evidence from Asian stock futures markets},
  year         = {2011},
}