Wavelet Estimation of Asymmetric Hedge Ratios: Does Econometric Sophistication Boost Hedging Effectiveness?
This paper utilises wavelet analysis, which is becoming popular in economics and finance, to estimate the hedge ratios for spot positions on the West Texas Intermediate crude oil, soybeans and the S&P500 index. This technique is combined with a two-stage regime switching threshold model to estimate asymmetric hedge ratios corresponding to positive and negative returns on futures contracts. Other simple and sophisticated techniques are also used as a benchmark for the purpose of comparison, including the naive model and the asymmetric error correction GJR-GARCH model. On the basis of the variance ratio test and variance reduction, it is revealed that econometric sophistication does not boost hedging effectiveness.
Volume (Year): 7 (2008)
Issue (Month): 3 (December)
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- Ripple, Ronald D. & Moosa, Imad A., 2009. "The effect of maturity, trading volume, and open interest on crude oil futures price range-based volatility," Global Finance Journal, Elsevier, vol. 20(3), pages 209-219.
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NBER Working Papers
6022, National Bureau of Economic Research, Inc.
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