Evaluating the hedging performance of the constant-correlation GARCH model
This paper compares the performances of the hedge ratios estimated from the OLS (ordinary least squares) method and the constant-correlation VGARCH (vector generalized autoregressive conditional heteroscedasticity) model. These methods are evaluated based on the out-of-sample optimal hedge ratio forecasts. A systematic comparison is provided by examining ten spot and futures markets covering currency futures, commodity futures and stock index futures. Using a recently proposed test (Tse, 2000) for the constant-correlation assumption, it is found that the assumption cannot be rejected for eight of the ten series. To gain the maximum benefit of a time-varying hedging strategy the estimation data is kept up-to-date for the re-estimation of the hedge ratios. Both the constant hedge ratio (using OLS) and the timevarying hedge ratio (using constant-correlation VGARCH) are re-estimated on a day-by-day rollover, and the post-sample variances of the hedged portfolios are examined. It is found that the OLS hedge ratio performs better than the VGARCH hedge ratio. This result may be another indication that the forecasts generated by the VGARCH models are too variable.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 12 (2002)
Issue (Month): 11 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAFE20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAFE20|
When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:12:y:2002:i:11:p:791-798. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.