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Evaluation of realized multi-power variations in minimum variance hedging

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  • Hung, Jui-Cheng

Abstract

This study investigated the hedging performance of realized multi-power variations under minimum variance strategy. The minimum variance hedge ratios are estimated by the realized DCC-GARCH model, and the risk and utility metrics are used to evaluate the performances of long and short hedge. The empirical results derived from the S&P 500 index demonstrated that the realized DCC-GARCH model with realized tri-power variation outperforms others in reducing risks, and generates largest economic benefits. While considering transaction costs, the superiority of the realized DCC-GARCH model with realized multi-power variations persists and produced less rebalancing costs than the realized DCC-GARCH model with realized variance.

Suggested Citation

  • Hung, Jui-Cheng, 2015. "Evaluation of realized multi-power variations in minimum variance hedging," Economic Modelling, Elsevier, vol. 51(C), pages 672-679.
    • Handle: RePEc:eee:ecmode:v:51:y:2015:i:c:p:672-679
    DOI: 10.1016/j.econmod.2015.08.024
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    2. Yao, Yuan & Zhao, Yang & Li, Yan, 2022. "A volatility model based on adaptive expectations: An improvement on the rational expectations model," International Review of Financial Analysis, Elsevier, vol. 82(C).
    3. Kuang, Wei, 2022. "The economic value of high-frequency data in equity-oil hedge," Energy, Elsevier, vol. 239(PA).

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