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The Cross‐Currency Hedging Performance of Implied Versus Statistical Forecasting Models

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  • Chris Brooks
  • James Chong

Abstract

This article examines the ability of several models to generate optimal hedge ratios. Statistical models employed include univariate and multivariate generalized autoregressive conditionally heteroscedastic (GARCH) models, and exponentially weighted and simple moving averages. The variances of the hedged portfolios derived using these hedge ratios are compared with those based on market expectations implied by the prices of traded options. One‐month and three‐month hedging horizons are considered for four currency pairs. Overall, it has been found that an exponentially weighted moving‐average model leads to lower portfolio variances than any of the GARCH‐based, implied or time‐invariant approaches. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1043–1069, 2001

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  • Chris Brooks & James Chong, 2001. "The Cross‐Currency Hedging Performance of Implied Versus Statistical Forecasting Models," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(11), pages 1043-1069, November.
    • Handle: RePEc:wly:jfutmk:v:21:y:2001:i:11:p:1043-1069
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    Cited by:

    1. Kuang, Wei, 2023. "The equity-oil hedge: A comparison between volatility and alternative risk frameworks," Energy, Elsevier, vol. 271(C).
    2. John Cotter & Jim Hanly, 2006. "Reevaluating hedging performance," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(7), pages 677-702, July.
    3. Ahmad Bash & Abdullah M. Al-Awadhi & Fouad Jamaani, 2016. "Measuring the Hedge Ratio: A GCC Perspective," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(7), pages 1-1, July.
    4. Mensi, Walid & Hamed Al-Yahyaee, Khamis & Vinh Vo, Xuan & Hoon Kang, Sang, 2021. "Dynamic spillover and connectedness between oil futures and European bonds," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    5. Pablo Urtubia & Alfonso Novales & Andrés Mora-Valencia, 2021. "Cross-Hedging Portfolios in Emerging Stock Markets: Evidence for the LATIBEX Index," Mathematics, MDPI, vol. 9(21), pages 1-19, October.
    6. Zura Kakushadze & Juan Andrés Serur, 2018. "151 Trading Strategies," Springer Books, Springer, number 978-3-030-02792-6, September.
    7. Waël Louhichi & Hassen Rais, 2019. "Refinement of the hedging ratio using copula-GARCH models," Journal of Asset Management, Palgrave Macmillan, vol. 20(5), pages 403-411, September.

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