Multiperiod hedging in the presence of conditional heteroskedasticity

Lien, Donald; Luo, Xiangdong

doi:10.1002/fut.3990140806

Cited by 68 publications

(63 citation statements)

References 35 publications

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“…Lien and Luo (1994) point out that, although GARCH (Generalized Autoregressive Conditional Heteroscedasticity) may characterize the price behavior, the cointegration relationship is the only truly indispensable component when comparing ex post performance of various hedge strategies. Lien ( 1996) provided theoretical support for the importance of the cointegrating relationship and pointed out that:…”

Section: Hedge Ratios With Colntegratlonmentioning

confidence: 99%

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M-GARCH Hedge Ratios and Hedging Effectiveness in Australian Futures Markets

Yang

2001

SSRN Journal

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Section: Hedge Ratios With Colntegratlonmentioning

confidence: 99%

“…4 However, the results are ready to su~ly on request. Following Ghosh (1993b), Lien and Luo (1994) and Lien (1996) …”

mentioning

confidence: 99%

M-GARCH Hedge Ratios and Hedging Effectiveness in Australian Futures Markets

Yang

2001

SSRN Journal

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“…However, Lien (2005) observed that the OLS hedge ratio outperforms the time-varying hedge ratio, which is confirmed by the findings of Bhargava and Malhotra (2007), who found that OLS performs better during the short-run. Furthermore, Lien and Luo (1994) commented that both constant as well as time-varying hedge ratios are equally efficient when the trader is extremely risk averse. Ederington (1979) further suggested that futures hedging for longer periods performs much better than for shorter periods, which is also consistent with the findings of Figlewski (1984) who observed that a one day hedge is comparatively less effective than a one week hedge due to the presence of higher basis risk.…”

Section: Review Of Literaturementioning

confidence: 99%

Impact Of Financial Crisis On Hedging Effectiveness Of Futures Contracts: Evidence From The National Stock Exchange Of India

Gupta

Kaur

2015

South East European Journal of Economics and Business

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The present study examines the impact of the 2008 financial crisis on the hedging effectiveness of three index futures contracts traded on the National Stock Exchange of India for near, next and far month contracts over the sample period of January 2000 – June 2014. The hedge ratios were calculated using eight methods; Naive hedging, Ederington’s Model, Autoregressive Integrated Moving Average, Vector Autoregressive, Vector Error Correction Methodology, Generalized Autoregressive Conditional Heteroskedasticity, Exponential Generalized Autoregressive Conditional Heteroscedasticity and Threshold Generalized Autoregressive Conditional Heteroskedasticity. The study finds an improvement in hedging effectiveness during the post-crisis period, which implies that during the high-volatility period hedging effectiveness also improves. It was also found that near month futures contracts are a more effective tool for hedging as compared to next and far month contracts, which imply that liquidity is a more important determinant of hedging effectiveness than hedge horizons. The study also finds that a time-invariant hedge ratio is more efficient than time-variant hedging. Therefore, knowledge of sophisticated econometrical tools does not help to improve hedge effectiveness.

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“…One of the techniques to solve for the problem of serial correlation and to account for the important role of cointegration between spot and futures prices has been the use of ECM in the estimation of hedge ratios. In particular Ghosh [19; 18], Lien and Luo [34], and Lien [33] have recognized that ignoring error correction mechanisms yields downward biased estimates for hedge ratios.…”

Section: Multivariate Garch Models In Hedgingmentioning

confidence: 99%

Evaluating Multivariate GARCH Models in the Nordic Electricity Markets

Malo¹,

Kanto²

2006

Communications in Statistics - Simulation and Computation

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This paper considers a variety of specification tests for multivariate GARCH models that are used in dynamic hedging in the electricity markets. The test statistics include the robust conditional moments tests for sign-size bias along with the recently introduced copula tests for an appropriate dependence structure. We consider this effort worthwhile, since quite often the tests of multivariate GARCH models are easily omitted and the models become selected ad-hoc depending on the results they generate. Hedging performance comparisons, in terms of unconditional and conditional ex-post variance portfolio reduction, are conducted.

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Multiperiod hedging in the presence of conditional heteroskedasticity

Cited by 68 publications

References 35 publications

M-GARCH Hedge Ratios and Hedging Effectiveness in Australian Futures Markets

M-GARCH Hedge Ratios and Hedging Effectiveness in Australian Futures Markets

Impact Of Financial Crisis On Hedging Effectiveness Of Futures Contracts: Evidence From The National Stock Exchange Of India

Evaluating Multivariate GARCH Models in the Nordic Electricity Markets

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