Copula-Based Price Risk Hedging Models
The article deals with the issue of copula use in the program of market risk hedging. Copula-models performance is compared to the OLS-based ones. Fully parametric and semi-parametric approaches to copula-modeling are investigated. The copula-based models efficiency is illustrated by the fact of decreasing the daily profit-and-loss volatility of the hedged portfolio by simultaneously augmenting its total yield compared to the OLS-based hedge ratio computation during the back-testing period. Never-the-less, it is shown that copula-based approaches are able to outperform OLS-based ones only for direct hedging programs, while for cross-hedging ones OLS do better
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- Robert J. Myers & Steven D. Hanson, 1996. "Optimal Dynamic Hedging in Unbiased Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(1), pages 13-20.
- Penikas, H., 2010. "Financial Applications of Copula-Models," Journal of the New Economic Association, New Economic Association, issue 7, pages 24-44.
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- Lien, Donald, 2004. "Cointegration and the optimal hedge ratio: the general case," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(5), pages 654-658, December.
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