Basis Convergence and Long Memory in Volatility When Dynamic Hedging with Futures

Dark, Jonathan

doi:10.1017/s0022109000003483

Cited by 21 publications

(14 citation statements)

References 63 publications

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“…Previous research has employed bivariate MS-GARCH (Lee and Yoder, 2007;Lee, 2009), MS-VECM-GARCH (Alizadeh et al, 2008) and bivariate FIGARCH (Dark, 2007), yet there has been no attempt to jointly capture cointegration, long memory, asymmetries and structural change.…”

Section: Applicationmentioning

confidence: 99%

“…Lien (1996) shows that failure to allow for cointegration generally results in a smaller than optimal hedge ratio, and this has a significant adverse effect on hedging. Failure to allow for regime switching (Alizadeh et al, 2008;Lee, 2011) and long memory in volatility (Dark, 2007) also results in a deterioration in hedging performance. The evidence with respect to volatility asymmetries though is mixed (Meneu and Torro, 2003;Lien and Yang, 2006).…”

Section: Introductionmentioning

confidence: 99%

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Futures hedging with Markov switching vector error correction FIEGARCH and FIAPARCH

Dark

2015

Journal of Banking & Finance

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Section: Applicationmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Futures hedging with Markov switching vector error correction FIEGARCH and FIAPARCH

Dark

2015

Journal of Banking & Finance

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“…Not only the return series itself but also its volatility is an important input for investment, derivatives pricing, and financial market regulation (Taylor (2000), Poon and Granger (2003) and Dark (2007)). Furthermore, volatility is used for the measurement of value-at-risk (VaR) in risk management (Jorion (2000)).…”

Section: Long Memory Properties Of Financial Time Seriesmentioning

confidence: 99%

Sovereign Default Swap Market Efficiency and Country Risk in the Eurozone

Gündüz

Kaya²

2012

SSRN Journal

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93-7 (Printversion) Non-technical summaryCredit default swaps (CDSs) are financial derivatives that are designed to transfer credit risk between banks, hedge funds or asset managers in a simple way: The buyer of the CDS is insured by the seller against the default of the underlying sovereign entity. The insurance premium (or "the CDS spread") of these CDSs written on sovereign entities have been seen as an important indicator of the economic health of a given country. This paper uses CDS spread changes as a measure for the informational efficiency of the sovereign markets and CDS spread volatilities as a proxy for persistency of country risks. Specifically, we test whether the dependence of consecutive observations dies out slowly over time ("long memory"). We firstly show that there is no evidence of such behavior of CDS spread changes for any of the 10 eurozone countries in our sample. This indicates that, despite the financial crisis and uncertainty of financial markets, price discovery processes satisfy the minimum requirements for a weak form of market efficiency for sovereign CDSs, i.e. recent CDS spread changes cannot be predicted with past CDS spread changes. Second, there is strong evidence of long memory for volatility patterns of spread changes for 6 out of 10 countries. Specifically, we observe Greece, Portugal, Ireland, Italy, Spain, and Belgium to demonstrate such behavior. This shows that economies in the eurozone, which have been particularly affected by the financial and the sovereign debt crisis, are exposed to high uncertainty risk not only for a short period but over a persistent horizon. Third, we illustrate that CDS volatility is causal to CDS levels, indicating that uncertainty in CDS markets translates into higher risk premia for sovereign risk. Finally, we highlight the existence of a comovement of CDS spread changes for all countries, which is more explicit among peripheral economies. Our results have implications on selecting sovereign risk measures: Increased global risk aversion and the uncertainty about future sovereign debt market conditions have caused an increase in sovereign CDS volatility, which has been shown to be a meaningful measure of sovereign risk. Specifically, we apply semi-parametric and parametric methods to the sovereign CDSs of 10 eurozone countries to test the evidence of long memory behavior during the financial crisis. Our analysis reveals that there is no evidence of long memory for the spread changes, which indicates that the price discovery process functions efficiently for sovereign CDS markets even during the crisis. In contrast, both semi-parametric methods and the dual-parametric model imply persistent behavior in the volatility of changes for Greece, Portugal, Ireland, Italy, Spain, and Belgium addressing persistent sovereign uncertainty. We provide evidence of causality from volatility in CDS prices to sovereign risk premiums for these peripheral economies. Nicht-technische ZusammenfassungWe furthermore demonstrate the potential spillover effects of sp...

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“…Long memory in conditional volatility of exchange rate has long been recognized in the literature, see, for example, Cheung (1993),Baillie, Bollerslev, and Mikkelsen (1996), andTeyssiere (1997) Dark (2005). documented similar property in stock returns whereasBunetti and Gilbert (2000) found long memory conditional volatility in crude oil futures prices.…”

mentioning

confidence: 97%