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Optimal hedge ratios in the presence of common jumps

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  • Wing Hong Chan

Abstract

This study derives optimal hedge ratios with infrequent extreme news events modeled as common jumps in foreign currency spot and futures rates. A dynamic hedging strategy based on a bivariate GARCH model augmented with a common jump component is proposed to manage currency risk. We find significant common jump components in the British pound spot and futures rates. The out‐of‐sample hedging exercises show that optimal hedge ratios which incorporate information from common jump dynamics substantially reduce daily and weekly portfolio risk. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:801–807, 2010

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  • Wing Hong Chan, 2010. "Optimal hedge ratios in the presence of common jumps," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(8), pages 801-807, August.
    • Handle: RePEc:wly:jfutmk:v:30:y:2010:i:8:p:801-807
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    Cited by:

    1. Kotkatvuori-Örnberg, Juha, 2016. "Dynamic conditional copula correlation and optimal hedge ratios with currency futures," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 60-69.

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