Advanced Search
MyIDEAS: Login to save this paper or follow this series

Optimal Hedging with the Vector Autoregressive Model

Contents:

Author Info

  • Lukasz Gatarek

    (Erasmus University Rotterdam)

  • Søren Johansen

    (University of Copenhagen, CREATES, Denmark)

Registered author(s):

    Abstract

    We derive the optimal hedging ratios for a portfolio of assets driven by a Cointegrated Vector Autoregressive model with general cointegration rank. Our hedge is optimal in the sense of minimum variance portfolio. We consider a model that allows for the hedges to be cointegrated with the hedged asset and among themselves. We nd that the minimum variance hedge for assets driven by the CVAR, depends strongly on the portfolio holding period. The hedge is dened as a function of correlation and cointegration parameters. For short holding periods the correlation impact is predominant. For long horizons, the hedge ratio should overweight the cointegration parameters rather then short-run correlation information. In the innite horizon, the hedge ratios shall be equal to the cointegrating vector. The hedge ratios for any intermediate portfolio holding period should be based on the weighted average of correlation and cointegration parameters. The results are general and can be applied for any portfolio of assets that can be modeled by the CVAR of any rank and order.

    Download Info

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below under "Related research" whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 14-022/III.

    as in new window
    Length:
    Date of creation: 18 Feb 2014
    Date of revision:
    Handle: RePEc:dgr:uvatin:20140022

    Contact details of provider:
    Web page: http://www.tinbergen.nl

    Related research

    Keywords: hedging; cointegration; minimum variance portfolio;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Dimitri Vayanos, 2004. "Flight to quality, flight to liquidity, and the pricing of risk," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 456, London School of Economics and Political Science, LSE Library.
    2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, American Finance Association, vol. 7(1), pages 77-91, 03.
    3. Phillips, P C B, 1988. "Reflections on Econometric Methodology," The Economic Record, The Economic Society of Australia, vol. 64(187), pages 344-59, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:dgr:uvatin:20140022. See general 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: (Antoine Maartens (+31 626 - 160 892)).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.