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
References listed on IDEAS
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- Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988.
"Estimation of the Optimal Futures Hedge,"
The Review of Economics and Statistics,
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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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- 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.
- repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
- Mello, Antonio S & Parsons, John E, 2000. "Hedging and Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 127-153.
- Penikas, H., 2010. "Financial Applications of Copula-Models," Journal of the New Economic Association, New Economic Association, issue 7, pages 24-44.
- Chang, Eric C. & Wong, Kit Pong, 2003. "Cross-Hedging with Currency Options and Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(03), pages 555-574, September.
- Bouye, Eric & Durlleman, Valdo & Nikeghbali, Ashkan & Riboulet, Gaël & Roncalli, Thierry, 2000. "Copulas for finance," MPRA Paper 37359, University Library of Munich, Germany.
- Kim, Gunky & Silvapulle, Mervyn J. & Silvapulle, Paramsothy, 2007. "Comparison of semiparametric and parametric methods for estimating copulas," Computational Statistics & Data Analysis, Elsevier, vol. 51(6), pages 2836-2850, March. Full references (including those not matched with items on IDEAS)
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