Title

Evaluating the Hedging Performance of the Constant-Correlation GARCH Model

Publication Type

Journal Article

Publication Date

2002

Abstract

This paper compares the performances of the hedge ratios estimated from the OLS (ordinary least squares) method and the constant-correlation VGARCH (vector generalized autoregressive conditional heteroscedasticity) model. These methods are evaluated based on the out-of-sample optimal hedge ratio forecasts. A systematic comparison is provided by examining ten spot and futures markets covering currency futures, commodity futures and stock index futures. Using a recently proposed test (Tse, 2000) for the constant-correlation assumption, it is found that the assumption cannot be rejected for eight of the ten series. To gain the maximum benefit of a time-varying hedging strategy the estimation data is kept up-to-date for the re-estimation of the hedge ratios. Both the constant hedge ratio (using OLS) and the timevarying hedge ratio (using constant-correlation VGARCH) are re-estimated on a day-by-day rollover, and the post-sample variances of the hedged portfolios are examined. It is found that the OLS hedge ratio performs better than the VGARCH hedge ratio. This result may be another indication that the forecasts generated by the VGARCH models are too variable. [ABSTRACT FROM AUTHOR]

Discipline

Econometrics | Finance

Research Areas

Econometrics

Publication

Applied Financial Economics

Volume

12

Issue

11

First Page

791

Last Page

798

ISSN

0960-3107

Identifier

10.1080/09603100110046045

Publisher

Taylor and Francis

Additional URL

http://dx.doi.org/10.1080/09603100110046045

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