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Combining time-varying and dynamic multi-period optimal hedging models

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  • Michael S. Haigh
  • Matthew T. Holt

Abstract

This paper presents an effective way of combining two distinct approaches used in the hedging literature--dynamic programming (DP) and time-series (GARCH) econometrics. Theoretically consistent yet realistic and tractable models are developed for traders interested in hedging a portfolio. Results from a bootstrapping experiment used to construct confidence bands around the competing portfolios suggest that, whereas DP--GARCH outperforms the GARCH approach, they are statistically equivalent to the OLS approach when the markets are stable. Traders may achieve significant gains, however, by adopting the DP--GARCH model rather than the OLS approach when markets are volatile. Copyright 2002, Oxford University Press.

Suggested Citation

  • Michael S. Haigh & Matthew T. Holt, 2002. "Combining time-varying and dynamic multi-period optimal hedging models," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 29(4), pages 471-500, December.
    • Handle: RePEc:oup:erevae:v:29:y:2002:i:4:p:471-500
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    Cited by:

    1. Rodt, Marc & Schäfer, Klaus, 2005. "Absicherung von Strompreisrisiken mit Futures: Theorie und Empirie," Freiberg Working Papers 2005/18, TU Bergakademie Freiberg, Faculty of Economics and Business Administration.
    2. Tejeda, Hernan A. & Goodwin, Barry K., 2011. "Testing the Performance of Multiproduct Optimal Hedging with Time-Varying Correlations in Storable and Non-storable Commodities," 2011 Conference, April 18-19, 2011, St. Louis, Missouri 285341, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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