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Hedge Ratio Prediction with Noisy and Asynchronous High‐Frequency Data

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  • Yu‐Sheng Lai

Abstract

A growing body of literature has focused on the design of covariance estimators for identifying when high‐frequency asset prices are asynchronous and contaminated by microstructure noise. This paper presents a comparison of the prediction ability of covariance estimators within a high‐frequency‐based multivariate volatility model for hedge ratio prediction. Empirical results show that the noise‐free predictions are superior to those contaminated by the noise, with the utility gains being particularly substantial for hedgers with pronounced risk aversion. The results demonstrate the importance of removing microstructure noise and asynchronous trading from covariance estimation to achieve accurate hedge ratio prediction. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:295–314, 2016

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  • Yu‐Sheng Lai, 2016. "Hedge Ratio Prediction with Noisy and Asynchronous High‐Frequency Data," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(3), pages 295-314, March.
    • Handle: RePEc:wly:jfutmk:v:36:y:2016:i:3:p:295-314
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    Cited by:

    1. Asai Manabu & So Mike K. P., 2023. "Realized BEKK-CAW Models," Journal of Time Series Econometrics, De Gruyter, vol. 15(1), pages 49-77, January.
    2. Yu‐Sheng Lai, 2018. "Estimation of the optimal futures hedge ratio for equity index portfolios using a realized beta generalized autoregressive conditional heteroskedasticity model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(11), pages 1370-1390, November.
    3. Yu‐Sheng Lai, 2021. "Generalized autoregressive score model with high‐frequency data for optimal futures hedging," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(12), pages 2023-2045, December.
    4. Yu-Sheng Lai, 2018. "Dynamic hedging with futures: a copula-based GARCH model with high-frequency data," Review of Derivatives Research, Springer, vol. 21(3), pages 307-329, October.
    5. Manabu Asai & Mike K. P. So, 2021. "Quasi‐maximum likelihood estimation of conditional autoregressive Wishart models," Journal of Time Series Analysis, Wiley Blackwell, vol. 42(3), pages 271-294, May.
    6. Yu‐Sheng Lai, 2019. "Flexible covariance dynamics, high‐frequency data, and optimal futures hedging," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(12), pages 1529-1548, December.
    7. Lai, Yu-Sheng, 2023. "Economic evaluation of dynamic hedging strategies using high-frequency data," Finance Research Letters, Elsevier, vol. 57(C).

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