IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Currency hedging strategies using dynamic multivariate GARCH

  • Chang, Chia-Lin
  • González-Serrano, Lydia
  • Jimenez-Martin, Juan-Angel

This paper examines the effectiveness of using futures contracts as hedging instruments of: (1) alternative models of volatility for estimating conditional variances and covariances; (2) alternative currencies; and (3) alternative maturities of futures contracts. For this purpose, daily data of futures and spot exchange rates of three major international currencies, Euro, British pound and Japanese yen, against the American dollar, are used to analyze hedge ratios and hedging effectiveness resulting from using two different maturity currency contracts, near-month and next-to-near-month contract. We estimate four multivariate volatility models (namely CCC, VARMA-AGARCH, DCC and BEKK), and calculate optimal portfolio weights and optimal hedge ratios to identify appropriate currency hedging strategies. The hedging effectiveness index suggests that the best results in terms of reducing the variance of the portfolio are for the USD/GBP exchange rate. The empirical results show that futures hedging strategies are slightly more effective when the near-month future contract is used for the USD/GBP and USD/JPY currencies. Moreover, the CCC and AGARCH models provide similar hedging effectiveness, which suggests that dynamic asymmetry may not be crucial empirically, although some differences appear when the DCC and BEKK models are used.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0378475412000638
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Mathematics and Computers in Simulation (MATCOM).

Volume (Year): 94 (2013)
Issue (Month): C ()
Pages: 164-182

as
in new window

Handle: RePEc:eee:matcom:v:94:y:2013:i:c:p:164-182
DOI: 10.1016/j.matcom.2012.02.008
Contact details of provider: Web page: http://www.journals.elsevier.com/mathematics-and-computers-in-simulation/

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. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun.
  2. Raffaella Giacomini & Ivana Komunjer, 2003. "Evaluation and Combination of Conditional Quantile Forecasts," Boston College Working Papers in Economics 571, Boston College Department of Economics.
  3. Michael McAleer & Juan-Ángel Jiménez-Martín & Teodosio Pérez-Amaral, 2011. "International Evidence on GFC-robust Forecasts for Risk Management under the Basel Accord," KIER Working Papers 757, Kyoto University, Institute of Economic Research.
  4. Baillie, Richard T & Bollerslev, Tim, 2002. "The Message in Daily Exchange Rates: A Conditional-Variance Tale," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 60-68, January.
  5. Michael McAleer, 2009. "The Ten Commandments For Optimizing Value-At-Risk And Daily Capital Charges," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 831-849, December.
  6. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  7. Chatayan Wiphatthanananthakul & Michael McAleer, 2009. "A Simple Expected Volatility (SEV) Index: Application to SET50 Index Options," Documentos de Trabajo del ICAE 0916, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  8. Michael McAleer & Suhejla Hoti & Felix Chan, 2009. "Structure and Asymptotic Theory for Multivariate Asymmetric Conditional Volatility," Econometric Reviews, Taylor & Francis Journals, vol. 28(5), pages 422-440.
  9. M. Ruth & K. Donaghy & P. Kirshen, 2006. "Introduction," Chapters, in: Regional Climate Change and Variability, chapter 1 Edward Elgar Publishing.
  10. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  11. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March.
  12. Byström, Hans, 2001. "Managing Extreme Risks in Tranquil and Volatile Markets Using Conditional Extreme Value Theory," Working Papers 2001:18, Lund University, Department of Economics.
  13. Hammoudeh, S.M. & Yuan, Y. & McAleer, M.J. & Thompson, M.A., 2009. "Precious Metals-Exchange Rate Volatility Transmissions and Hedging Strategies," Econometric Institute Research Papers EI 2009-38, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  14. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  15. Atreya Chakraborty & John Barkoulas, 1999. "Dynamic futures hedging in currency markets," The European Journal of Finance, Taylor & Francis Journals, vol. 5(4), pages 299-314.
  16. Donald Lien & Y. K. Tse & Albert Tsui, 2002. "Evaluating the hedging performance of the constant-correlation GARCH model," Applied Financial Economics, Taylor & Francis Journals, vol. 12(11), pages 791-798.
  17. Yuan-Hung Hsu Ku & Ho-Chyuan Chen & Kuang-Hua Chen, 2007. "On the application of the dynamic conditional correlation model in estimating optimal time-varying hedge ratios," Applied Economics Letters, Taylor & Francis Journals, vol. 14(7), pages 503-509.
  18. Ling, Shiqing & McAleer, Michael, 2003. "Asymptotic Theory For A Vector Arma-Garch Model," Econometric Theory, Cambridge University Press, vol. 19(02), pages 280-310, April.
  19. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2011. "Crude oil hedging strategies using dynamic multivariate GARCH," Energy Economics, Elsevier, vol. 33(5), pages 912-923, September.
  20. Shiqing Ling & Michael McAleer, 2001. "Necessary and Sufficient Moment Conditions for the GARCH(r,s) and Asymmetric Power GARCH(r,s) Models," ISER Discussion Paper 0534, Institute of Social and Economic Research, Osaka University.
  21. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
  22. BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen VK, . "Multivariate GARCH models: a survey," CORE Discussion Papers RP 1847, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  23. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
  24. McNeil, Alexander J. & Frey, Rudiger, 2000. "Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 271-300, November.
  25. McAleer, Michael, 2005. "Automated Inference And Learning In Modeling Financial Volatility," Econometric Theory, Cambridge University Press, vol. 21(01), pages 232-261, February.
  26. Hakim, Abdul & McAleer, Michael, 2009. "Forecasting conditional correlations in stock, bond and foreign exchange markets," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(9), pages 2830-2846.
  27. Massimiliano Caporin & Michael McAleer, 2010. "Model Selection and Testing of Conditional and Stochastic Volatility Models," Working Papers in Economics 10/58, University of Canterbury, Department of Economics and Finance.
  28. Massimiliano Caporin & Michael McAleer, 2008. "Scalar BEKK and indirect DCC," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(6), pages 537-549.
  29. Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(04), pages 535-551, December.
  30. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  31. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
  32. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
  33. Pérignon, Christophe & Deng, Zi Yin & Wang, Zhi Jun, 2008. "Do banks overstate their Value-at-Risk?," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 783-794, May.
  34. McAleer, Michael & Chan, Felix & Marinova, Dora, 2007. "An econometric analysis of asymmetric volatility: Theory and application to patents," Journal of Econometrics, Elsevier, vol. 139(2), pages 259-284, August.
  35. Chan Wing Hong, 2008. "Dynamic Hedging with Foreign Currency Futures in the Presence of Jumps," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(2), pages 1-25, May.
  36. Massimiliano Caporin & Michael McAleer, 2010. "The Ten Commandments For Managing Investments," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 196-200, 02.
  37. Ronald D. Ripple & Imad A. Moosa, 2007. "Hedging effectiveness and futures contract maturity: the case of NYMEX crude oil futures," Applied Financial Economics, Taylor & Francis Journals, vol. 17(9), pages 683-689.
Full references (including those not matched with items on IDEAS)

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

When requesting a correction, please mention this item's handle: RePEc:eee:matcom:v:94:y:2013:i:c:p:164-182. 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: (Shamier, Wendy)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.