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Dynamic hedging performance and downside risk: Evidence from Nikkei index futures

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  • Ubukata, Masato

Abstract

This paper assesses the incremental value of dynamic futures hedging models in minimizing downside risks including value-at-risk, expected shortfall, exponential spectral risk measure and lower partial moment over unconditional hedging approaches. We estimate hedge ratios using dynamic conditional correlation models incorporating high-frequency measures of volatility and correlation under multivariate skewed t-distributions. In the out-of-sample analysis with daily rebalancing and a portfolio hedged with Nikkei 225 futures, the unconditional minimum downside risk approaches perform worse than the proposed conditional approaches. The use of high-frequency measures possibly improves performance of the conditional downside-risk hedging models.

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  • Ubukata, Masato, 2018. "Dynamic hedging performance and downside risk: Evidence from Nikkei index futures," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 270-281.
  • Handle: RePEc:eee:reveco:v:58:y:2018:i:c:p:270-281
    DOI: 10.1016/j.iref.2018.03.026
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    Cited by:

    1. Jieye Qin & Christopher J. Green & Kavita Sirichand, 2019. "Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk, and transaction costs," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(10), pages 1269-1300, October.

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    Keywords

    C58; Optimal hedge ratio; Value-at-risk; Expected shortfall; Spectral risk measures; Realized covariance measure;
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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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