Dynamic Hedging with Foreign Currency Futures in the Presence of Jumps
AbstractA dynamic hedging strategy based on a bivariate GARCH-jump model augmented with autoregressive jump intensity is proposed to manage currency risk. The GARCH-jump model, capable of capturing volatility clustering and leptokurtosis, provides a comprehensive description of the joint dynamics of the currency spot rate and the futures basis. We find significant common jump components in the currency spot rate and futures basis with jump sizes response asymmetrical to futures basis changes. Our out-of-sample hedging exercises show optimal hedge ratios incorporating information from common jump dynamics substantially reduce the portfolio risk of foreign currencies.
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Bibliographic InfoArticle provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.
Volume (Year): 12 (2008)
Issue (Month): 2 (May)
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Web page: http://www.degruyter.com
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- Chang, Chia-Lin & González-Serrano, Lydia & Jimenez-Martin, Juan-Angel, 2013.
"Currency hedging strategies using dynamic multivariate GARCH,"
Mathematics and Computers in Simulation (MATCOM),
Elsevier, vol. 94(C), pages 164-182.
- Chia-Lin Chang & Lydia González-Serrano & Juan-Ángel Jiménez-Martín, 2011. "Currency Hedging Strategies Using Dynamic Multivariate GARCH," Documentos de Trabajo del ICAE 2011-33, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
- Chia-Lin Chang & Lydia González-Serrano & Juan-Ángel Jiménez-Martín, 2012. "Currency Hedging Strategies Using Dynamic Multivariate GARCH," Documentos de Trabajo del ICAE 2012-07, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico, revised Feb 2012.
- Chang, Kuang-Liang, 2012. "The time-varying and asymmetric dependence between crude oil spot and futures markets: Evidence from the Mixture copula-based ARJI–GARCH model," Economic Modelling, Elsevier, vol. 29(6), pages 2298-2309.
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