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Basis convergence and long memory in volatility when dynamic hedging with SPI futures

  • Jonathan Dark

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    This paper examines the importance of basis convergence and long memory in volatility when estimating minimum variance hedge ratios (MVHRs) using SPI futures. The paper employs a bivariate FIGARCH model with a maturity effect to model the joint dynamics of the Australian All Ordinaries Index and the basis. This new approach allows for long memory in volatility, time varying correlations and the convergence between the All Ordinaries Index and its SPI futures over the life of the futures contract. The results illustrate the importance of these effects when modelling the joint dynamics and when estimating dynamic MVHRs.

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    File URL: http://www.buseco.monash.edu.au/ebs/pubs/wpapers/2004/wp6-04.pdf
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    Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 6/04.

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    Length: 40 pages
    Date of creation: Mar 2004
    Date of revision:
    Handle: RePEc:msh:ebswps:2004-6
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    Web page: http://www.buseco.monash.edu.au/depts/ebs/
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    1. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
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