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Copula based Dynamic Hedging Strategy with Futures

Author

Listed:
  • Marcelo Brutti Righi

    (Federal University of Santa Maria)

  • Paulo Sergio Ceretta

    (Federal University of Santa Maria)

Abstract

We present in this paper a dynamic hedging strategy for futures based exclusively on copula functions. We develop an algorithm based on numerical simulations from estimated copula and marginal probability function to obtain innovations. We illustrate our approach through an empirical example with Crude Oil and Gold. OLS static estimate showed itself improper and the proposed algorithm obtained very good results in spot/future variance reduction strategy.

Suggested Citation

  • Marcelo Brutti Righi & Paulo Sergio Ceretta, 2012. "Copula based Dynamic Hedging Strategy with Futures," Economics Bulletin, AccessEcon, vol. 32(4), pages 3394-3400.
    • Handle: RePEc:ebl:ecbull:eb-12-00639
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I4-P327.pdf
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    References listed on IDEAS

    as
    1. Choudhry, Taufiq, 2003. "Short-run deviations and optimal hedge ratio: evidence from stock futures," Journal of Multinational Financial Management, Elsevier, vol. 13(2), pages 171-192, April.
    2. François Longin & Bruno Solnik, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    3. Chen, Xiaohong & Fan, Yanqin, 2006. "Estimation and model selection of semiparametric copula-based multivariate dynamic models under copula misspecification," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 125-154.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Dynamic Hedging Strategy; Future Markets; Copula Functions.;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C0 - Mathematical and Quantitative Methods - - General

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