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The Superiority of Time-Varying Hedge Ratios in Turkish Futures

Author

Listed:
  • Onur Olgun

    (Department of International Trade and Finance, Izmir University of Economics)

  • Ý. Hakan Yetkiner

    () (Department of Economics, Izmir University of Economics)

Abstract

This paper aims to compare the effectiveness of constant hedge ratio estimates (obtained through OLS and VECM methods) and time-varying hedge ratio estimates (obtained via M-GARCH method) for future contracts of ISE-30 index of TurkDEX. We use portfolio variance reduction as the measure of hedging effectiveness. We find that time-varying hedge ratios outperform the constant ratios for both in-sample and out-of-sample datasets and provide the minimum variance values.

Suggested Citation

  • Onur Olgun & Ý. Hakan Yetkiner, 2009. "The Superiority of Time-Varying Hedge Ratios in Turkish Futures," Working Papers 0907, Izmir University of Economics.
  • Handle: RePEc:izm:wpaper:0907
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    File URL: http://eco.ieu.edu.tr/wp-content/wp0907.pdf
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    Keywords

    Futures Pricing; Hedging; MGARCH; Hedging Effectiveness;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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