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

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  • Haigh, Michael S.
  • Holt, Matthew T.

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.

Suggested Citation

  • Haigh, Michael S. & Holt, Matthew T., 2002. "Combining Time-Varying And Dynamic Multi-Period Optimal Hedging Models," Working Papers 28593, University of Maryland, Department of Agricultural and Resource Economics.
    • Handle: RePEc:ags:umdrwp:28593
    DOI: 10.22004/ag.econ.28593
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    Cited by:

    1. Rodt, Marc & Schäfer, Klaus, 2005. "Absicherung von Strompreisrisiken mit Futures: Theorie und Empirie," Freiberg Working Papers 2005/18, TU Bergakademie Freiberg, Faculty of Economics and Business Administration.

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