Dynamic correlations and optimal hedge ratios charles s bos∗,a,b and phillip gouldb atinbergen institute, the netherlands bdepartment of econometrics & or, vu university amsterdam, the netherlands august 14, 2007 abstract the focus of this article is to compare dynamic correlation models for the calculation. 1 estimation and performance evaluation of optimal hedge ratios in the carbon market of the european union emissions trading scheme john hua fan1, eduardo roca and alexandr akimov department of accounting, finance and economics. Estimating optimal hedge ratio and hedge effectiveness via fitting the multivariate skewed distributions wei-han liu department of finance faculty of business, economics and law they are used to choose the better hedge strategy the major traditional criteria include. 1 to determine the optimal hedging ratio under static models 2 to analyse the hedging efficiency of commodity futures under the above models estimating optimal hedge ratio and testing hedging efficiency of gold futures 1roopa santh lakshmi , 2dr s kalaiselvi 1phd scholar in commerce, vellalar college for women, erode 2.
Estimation of the optimal hedge ratio hedging using futures involves taking a position in the futures market that is opposite to the position held in the spot market. With the beta hedge strategy, his calculated as the negative of the beta of the cash portfolio thus, for example, if the cash portfolio beta is 15, the hedge ratio will be -15, since the cash portfolio is expected to move by 15 times the movement in the futures contract, where the cash portfolio is that which underlies the futures contract. Optimal hedge ratio calculation the optimal hedge ratio, h , quantifies the systematic comovement between 2 assets it is called optimal since a position in future contracts of h minimizes the portfolio variance most it can be calculated based on the standard deviation of both the spot and future price and their correlation.
Estimation of optimal hedge ratios (hedging strategies): naïve or one-to-one hedge assumes that futures and cash prices move closely together in this traditional view of hedging, the holding of both the initial spot asset and the futures contract used to offset the risk of the spot asset are of equal magnitude but in opposite direction. Assets, the primary objective is to estimate the optimal hedge ratio (ohr) when agents have mean-variance utility and the futures price follows a martingale, the ohr is equivalent to the minimum variance hedge ratio, which can be estimated by regressing the spot market return on the futures market return using ordinary least squares. Dynamic correlations and optimal hedge ratios charles s bos∗,a,b and phillip gouldb atinbergen institute, ing estimating bekk or dcc models and alternatively through the use of unobserved also the practical eﬀectiveness of the hedging strategies is measured through the standard. Bivariate garch estimation of the optimal hedge ratios for stock index futures: a note authors tae h park, 5 wolfgang bessler, alexander leonhardt, dominik wolff, analyzing hedging strategies for fixed income portfolios: a bayesian approach for model a comparison of alternative hedge ratio estimation methods, economic modelling.
The hedging period is the same as the estimation time interval this paper also looks at several key issues when the holding period is longer than the estimation period, such as the construction of optimal minimum variance hedge ratios, and the trade-off between transaction costs and risk reduction. Optimal hedge ratio is calculated this time as the negative of the beta of the cash portfolio naturally, if the cash portfolio is that which underlies the futures position, the two strategies will give the same value for the hedge ratio. Relative to equation (2)-(3), the hedge ratio represents the ratio of the number of units of futures to the number of units of spot that must be hedged, whereas, relative to eq (4), hedge ratio is the ratio of the value of futures to the value of spot. The proposed optimal conditional hedge ratio is represented by a convex combination of the conditional hedge ratio from a bgarch model and an unconditional hedge ratio.
Based on a group of alternative optimal hedge ratio values for example, a number of hedging strategies within a 95% confidence interval for the optimal hedge ratio (eg, the 25th, 50th, and 75th percentiles) can be considered in this paper, we propose a new method of hedging based on interval estimation of the optimal hedge ratio. 16 y-t chen, on the optimal estimating function method for conditional correlation models, journal of financial econometrics, 2015, 13, 1, 83crossref 17 yu-chia hsu , an-pin chen , a clustering time series model for the optimal hedge ratio decision making, neurocomputing , 2014 , 138 , 358 crossref.
Researchers have distinguished three hedge strategies: the traditional one to one hedge, the beta hedge, and the minimum variance hedge all three strategies require determining the optimal hedge ratio h but the traditional strategy emphasizes the potential for futures contract to be used to reduce risk. Estimation and performance evaluation of optimal hedge ratios in the carbon market of the european union emissions trading scheme john hua fan , eduardo roca , alexandr akimov department of accounting, finance and economics, griffith university, australia. Thus, the calculation of the optimal hedge ratio plays a critical role in the hedging process as will be shown later, basically, the optimal hedge ratio is based on the coefficient of the regression between the change in spot prices and the change in prices of the hedging instrument.
Optimal hedge ratios and alternative hedging strategies in the presence of cointegrated time-varying risks ah-boon sim and ralf zurbruegg school of banking and finance, university of new south wales, sydney 2052. We re-estimate the optimal hedge ratios of both strategies on a day-by-day rollover, each time keeping the number of estimation observations unchanged assuming.