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Combining Time-Varying And Dynamic Multi-Period Optimal Hedging Models

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Author Info
Haigh, Michael S.
Holt, Matthew T.

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Abstract

This paper presents an effective way of combining two popular, yet distinct approaches used in the hedging literature – dynamic programming (DP) and time-series (GARCH) econometrics. Theoretically consistent yet realistic and tractable models are developed for traders interested in hedging a portfolio. Results from a bootstrapping experiment used to construct confidence bands around the competing portfolios suggest that while DP-GARCH outperforms the GARCH approach they are statistically equivalent to the OLS approach when the markets are stable. Significant gains may be achieved by a trader, however, by adopting the DP–GARCH model over the OLS approach when markets exhibit excessive volatility.

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Paper provided by University of Maryland, Department of Agricultural and Resource Economics in its series Working Papers with number 28593.

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Date of creation: 2002
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Handle: RePEc:ags:umdrwp:28593

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Keywords: Marketing;

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  1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June. [Downloadable!] (restricted)
  2. Gagnon, Louis & Lypny, Gregory J. & McCurdy, Thomas H., 1998. "Hedging foreign currency portfolios," Journal of Empirical Finance, Elsevier, vol. 5(3), pages 197-220, September. [Downloadable!] (restricted)
  3. Lence, Sergio H. & Kimle, Kevin & Hayenga, Marvin L., 2004. "A Dynamic Minimum Variance Hedge," Staff General Research Papers 11414, Iowa State University, Department of Economics.
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  4. Karp, Larry S, 1988. "Dynamic Hedging with Uncertain Production," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(4), pages 621-37, November. [Downloadable!] (restricted)
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  5. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun. [Downloadable!] (restricted)
  6. Rausser, Gordon C & Carter, Colin, 1983. "Futures Market Efficiency in the Soybean Complex," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 469-78, August. [Downloadable!] (restricted)
  7. Garcia, Philip & Roh, Jae-Sun & Leuthold, Raymond M, 1995. "Simultaneously Determined, Time-Varying Hedge Ratios in the Soybean Complex," Applied Economics, Taylor and Francis Journals, vol. 27(12), pages 1127-34, December.
  8. Anderson, Ronald W & Danthine, Jean-Pierre, 1983. "The Time Pattern of Hedging and the Volatility of Futures Prices," Review of Economic Studies, Blackwell Publishing, vol. 50(2), pages 249-66, April. [Downloadable!] (restricted)
  9. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February. [Downloadable!]
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  10. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March. [Downloadable!] (restricted)
  11. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-84, March. [Downloadable!] (restricted)
  12. Haigh, Michael S & Holt, Matthew T, 2000. " Hedging Multiple Price Uncertainty in International Grain Trade," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 82(4), pages 881-96, November. [Downloadable!] (restricted)
  13. Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988. "Estimation of the Optimal Futures Hedge," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 623-30, November. [Downloadable!] (restricted)
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  14. Peter S. Sephton, 1993. "Optimal Hedge Ratios at the Winnipeg Commodity Exchange," Canadian Journal of Economics, Canadian Economics Association, vol. 26(1), pages 175-93, February. [Downloadable!] (restricted)
  15. Pennings, Joost M. E. & M. Leuthold, Raymond, 2001. "Introducing new futures contracts: reinforcement versus cannibalism," Journal of International Money and Finance, Elsevier, vol. 20(5), pages 659-675, October. [Downloadable!] (restricted)
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