Combining Time-Varying And Dynamic Multi-Period Optimal Hedging Models
AbstractThis 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 DPGARCH model over the OLS approach when markets exhibit excessive volatility.
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Bibliographic InfoPaper provided by University of Maryland, Department of Agricultural and Resource Economics in its series Working Papers with number 28593.
Date of creation: 2002
Date of revision:
Other versions of this item:
- Michael S. Haigh & Matthew T. Holt, 2002. "Combining time-varying and dynamic multi-period optimal hedging models," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 29(4), pages 471-500, December.
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