Multi-period hedge ratios for a multi-asset portfolio when accounting for returns comovement
This article presents a model to select the optimal hedge ratios of a portfolio comprised of an arbitrary number of commodities. In particular, returns dependency and heterogeneous investment horizons are accounted for by copulas and wavelets, respectively. We analyze a portfolio of London Metal Exchange metals for the period July 1993-December 2005, and conclude that neglecting cross correlations leads to biased estimates of the optimal hedge ratios and the degree of hedge effectiveness. Furthermore, when compared with a multivariate-GARCH specification, our methodology yields higher hedge effectiveness for the raw returns and their short-term components.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gagnon, Louis & Lypny, Gregory J. & McCurdy, Thomas H., 1998. "Hedging foreign currency portfolios," Journal of Empirical Finance, Elsevier, vol. 5(3), pages 197-220, September.
- G McMillan, David, 2005. "Time-varying hedge ratios for non-ferrous metals prices," Resources Policy, Elsevier, vol. 30(3), pages 186-193, September.
- Lin Shinn-Juh & Stevenson Maxwell, 2001. "Wavelet Analysis of the Cost-of-Carry Model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(1), pages 1-17, April.
- 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 623-30, November.
- Fernandez Viviana P, 2005.
"The International CAPM and a Wavelet-Based Decomposition of Value at Risk,"
Studies in Nonlinear Dynamics & Econometrics,
De Gruyter, vol. 9(4), pages 1-37, December.
- Viviana Fernández, 2005. "The International CAPM and a wavelet-based decomposition of Value at Risk," Documentos de Trabajo 203, Centro de Economía Aplicada, Universidad de Chile.
- Viviana Fernandez, 2006. "The International CAPM and a Wavelet-Based Decomposition of Value at Risk," NBER Working Papers 12233, National Bureau of Economic Research, Inc.
- Viviana Fernandez, 2005. "The International CAPM and a wavelet-based decomposition of Value at Risk," The Institute for International Integration Studies Discussion Paper Series iiisdp075, IIIS.
- Lien, Donald & Wilson, Bradley K., 2001. "Multiperiod hedging in the presence of stochastic volatility," International Review of Financial Analysis, Elsevier, vol. 10(4), pages 395-406.
- Fernandez, Viviana & Lucey, Brian M., 2007. "Portfolio management under sudden changes in volatility and heterogeneous investment horizons," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 375(2), pages 612-624.
- In, Francis & Kim, Sangbae, 2006. "Multiscale hedge ratio between the Australian stock and futures markets: Evidence from wavelet analysis," Journal of Multinational Financial Management, Elsevier, vol. 16(4), pages 411-423, October.
- Giesecke, Kay, 2004. "Correlated default with incomplete information," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1521-1545, July.
- Markus Junker & Alexander Szimayer & Niklas Wagner, 2004. "Nonlinear Term Structure Dependence: Copula Functions, Empirics, and Risk Implications," Econometrics 0401007, EconWPA.
- Lien, Donald, 2005. "The use and abuse of the hedging effectiveness measure," International Review of Financial Analysis, Elsevier, vol. 14(2), pages 277-282.
- Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March.
- Chen, Sheng-Syan & Lee, Cheng-few & Shrestha, Keshab, 2003. "Futures hedge ratios: a review," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 433-465.
- Howard, Charles T. & D'Antonio, Louis J., 1984. "A Risk-Return Measure of Hedging Effectiveness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(01), pages 101-112, March.
When requesting a correction, please mention this item's handle: RePEc:edj:ceauch:242. 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: ()
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.