Basis convergence and long memory in volatility when dynamic hedging with SPI futures
AbstractThis paper examines the importance of basis convergence and long memory in volatility when estimating minimum variance hedge ratios (MVHRs) using SPI futures. The paper employs a bivariate FIGARCH model with a maturity effect to model the joint dynamics of the Australian All Ordinaries Index and the basis. This new approach allows for long memory in volatility, time varying correlations and the convergence between the All Ordinaries Index and its SPI futures over the life of the futures contract. The results illustrate the importance of these effects when modelling the joint dynamics and when estimating dynamic MVHRs.
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Bibliographic InfoPaper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 6/04.
Length: 40 pages
Date of creation: Mar 2004
Date of revision:
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Postal: PO Box 11E, Monash University, Victoria 3800, Australia
Web page: http://www.buseco.monash.edu.au/depts/ebs/
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Find related papers by JEL classification:
- G0 - Financial Economics - - General
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-04 (All new papers)
- NEP-ETS-2004-04-04 (Econometric Time Series)
- NEP-FIN-2004-04-04 (Finance)
- NEP-FMK-2004-04-04 (Financial Markets)
- NEP-RMG-2004-04-04 (Risk Management)
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.:
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Cowles Foundation Discussion Papers
979, Cowles Foundation for Research in Economics, Yale University.
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