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The role of long memory in hedging effectiveness

  • Coakley, Jerry
  • Dollery, Jian
  • Kellard, Neil

A joint fractionally integrated, error-correction and multivariate GARCH (FIEC-BEKK) approach is applied to investigate hedging effectiveness using daily data 1995-2005. The findings reveal the proxied error-correction term has a long memory component that theoretically should affect hedging effectiveness. When the FIEC model empirical conditions are satisfied, the FIEC-BEKK hedging strategy outperforms the OLS benchmark out of sample in terms of both variance reduction and hedger utility. A bootstrap exercise indicates that the variance reduction is statistically significant.

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Article provided by Elsevier in its journal Computational Statistics & Data Analysis.

Volume (Year): 52 (2008)
Issue (Month): 6 (February)
Pages: 3075-3082

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Handle: RePEc:eee:csdana:v:52:y:2008:i:6:p:3075-3082
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