Evaluating the hedging performance of the constant-correlation GARCH model
AbstractThis paper compares the performances of the hedge ratios estimated from the OLS (ordinary least squares) method and the constant-correlation VGARCH (vector generalized autoregressive conditional heteroscedasticity) model. These methods are evaluated based on the out-of-sample optimal hedge ratio forecasts. A systematic comparison is provided by examining ten spot and futures markets covering currency futures, commodity futures and stock index futures. Using a recently proposed test (Tse, 2000) for the constant-correlation assumption, it is found that the assumption cannot be rejected for eight of the ten series. To gain the maximum benefit of a time-varying hedging strategy the estimation data is kept up-to-date for the re-estimation of the hedge ratios. Both the constant hedge ratio (using OLS) and the timevarying hedge ratio (using constant-correlation VGARCH) are re-estimated on a day-by-day rollover, and the post-sample variances of the hedged portfolios are examined. It is found that the OLS hedge ratio performs better than the VGARCH hedge ratio. This result may be another indication that the forecasts generated by the VGARCH models are too variable.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 12 (2002)
Issue (Month): 11 ()
Contact details of provider:
Web page: http://www.tandfonline.com/RAFE20
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.