Regime switching correlation hedging
AbstractThis paper investigates the hedging effectiveness of commodity futures when the correlations of spot and futures returns are subject to multi-state regime shifts. An independent switching dynamic conditional correlation GARCH (IS-DCC) which is free from the problems of path-dependency and recombining is applied to model multi-regime switching correlations. The results of hedging exercises indicate that state-dependent IS-DCC outperforms state-independent DCC GARCH and three-state IS-DCC exhibits superior hedging effectiveness, illustrating importance of modeling higher-state switching correlations for dynamic futures hedging.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 34 (2010)
Issue (Month): 11 (November)
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Web page: http://www.elsevier.com/locate/jbf
Correlation hedging Minimum variance hedge ratio GARCH model Markov regime switching Commodity futures;
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