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A Copula‐Based Quantile Risk Measure Approach to Estimate the Optimal Hedge Ratio

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  • Massimiliano Barbi
  • Silvia Romagnoli

Abstract

We propose an innovative theoretical model to determine the optimal hedge ratio (OHR) with futures contracts as the minimizer of a quantile risk measure. This class of measures is very large and allows to recover the minimum‐VaR and the minimum‐expected shortfall hedge ratios as special cases. The copula representation of quantiles yields an accurate and flexible estimation of the dependence structure between the spot and the futures position. Employing data for the main UK and US indices, and EUR/USD and EUR/GBP exchange rates, we investigate the hedging effectiveness of our model compared to that of existing approaches. We document that our model improves upon the hedging performance of minimum‐VaR and minimum‐expected shortfall hedge ratios, provided that the copula shows an acceptable fit to the data. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:658–675, 2014

Suggested Citation

  • Massimiliano Barbi & Silvia Romagnoli, 2014. "A Copula‐Based Quantile Risk Measure Approach to Estimate the Optimal Hedge Ratio," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 34(7), pages 658-675, July.
    • Handle: RePEc:wly:jfutmk:v:34:y:2014:i:7:p:658-675
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    Cited by:

    1. Kuang, Wei, 2023. "The equity-oil hedge: A comparison between volatility and alternative risk frameworks," Energy, Elsevier, vol. 271(C).
    2. Barbi, Massimiliano & Romagnoli, Silvia, 2018. "Skewness, basis risk, and optimal futures demand," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 14-29.
    3. Brandtner, Mario & Kürsten, Wolfgang, 2014. "Decision making with Conditional Value-at-Risk and spectral risk measures: The problem of comparative risk aversion," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100615, Verein für Socialpolitik / German Economic Association.
    4. Wenming Shi & Kevin X. Li & Zhongzhi Yang & Ganggang Wang, 2017. "Time-varying copula models in the shipping derivatives market," Empirical Economics, Springer, vol. 53(3), pages 1039-1058, November.
    5. Francis Liu & Natalie Packham & Meng-Jou Lu & Wolfgang Karl Härdle, 2023. "Hedging cryptos with Bitcoin futures," Quantitative Finance, Taylor & Francis Journals, vol. 23(5), pages 819-841, May.
    6. Ubukata, Masato, 2018. "Dynamic hedging performance and downside risk: Evidence from Nikkei index futures," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 270-281.
    7. Tehrani , Reza & Veisizadeh , Vahid, 2021. "Dynamic Cross Hedging Effectiveness between Gold and Stock Market Based on Downside Risk Measures: Evidence from Iran Emerging Capital Market," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 16(1), pages 43-70, March.
    8. Sukcharoen, Kunlapath & Leatham, David J., 2017. "Hedging downside risk of oil refineries: A vine copula approach," Energy Economics, Elsevier, vol. 66(C), pages 493-507.

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