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Copula-Based Price Risk Hedging Models

Author

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  • Penikas, Henry

    () (Higher School of Economics, Russia)

Abstract

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

Suggested Citation

  • Penikas, Henry, 2011. "Copula-Based Price Risk Hedging Models," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 22(2), pages 3-21.
  • Handle: RePEc:ris:apltrx:0070
    as

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    File URL: http://pe.cemi.rssi.ru/pe_2011_2_03-21.pdf
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    References listed on IDEAS

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    1. Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988. "Estimation of the Optimal Futures Hedge," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 623-630, November.
    2. Lai, YiHao & Chen, Cathy W.S. & Gerlach, Richard, 2009. "Optimal dynamic hedging via copula-threshold-GARCH models," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(8), pages 2609-2624.
    3. 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.
    4. Nikolay Nenovsky & S. Statev, 2006. "Introduction," Post-Print halshs-00260898, HAL.
    5. Brodsky, Boris & Penikas, Henry & Safaryan, Irina, 2009. "Detection of Structural Breaks in Copula Models," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 16(4), pages 3-15.
    6. 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.
    7. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
    8. Mello, Antonio S & Parsons, John E, 2000. "Hedging and Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 127-153.
    9. Penikas, H., 2010. "Financial Applications of Copula-Models," Journal of the New Economic Association, New Economic Association, issue 7, pages 24-44.
    10. 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.
    11. Bouye, Eric & Durlleman, Valdo & Nikeghbali, Ashkan & Riboulet, Gaël & Roncalli, Thierry, 2000. "Copulas for finance," MPRA Paper 37359, University Library of Munich, Germany.
    12. 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.
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    Citations

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    Cited by:

    1. Blagoveschensky, Yury, 2012. "Basics of copula’s theory," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 26(2), pages 113-130.
    2. Lakshina, Valeriya, 2014. "Is it possible to break the «curse of dimensionality»? Spatial specifications of multivariate volatility models," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 36(4), pages 61-78.

    More about this item

    Keywords

    copula; direct hedging; cross hedging; hedge ratio;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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