Optimal hedge ratio estimation and hedge effectiveness with multivariate skew distributions

Abstract

This article proposes to use the three multivariate skew distributions (generalized hyperbolic distribution, multivariate skew normal distribution, and multivariate skew Student-t distribution) for estimating the minimum variance hedge ratio in a dynamic setting. Three criteria for measuring hedge effectiveness are employed: hedging instrument effectiveness, overall hedge effectiveness, and relative-tooptimal hedge ratio effectiveness (RHRE). Three portfolios of spot and futures series are formed for empirical analysis. The outcomes confirm that the three multivariate skew distributions are more helpful in deciding the minimum variance hedge ratio, especially the generalized hyperbolic distribution, than the symmetrical normal and Student-t distributions. This outperformance is significant especially at critical market moments and it is indicated by three hedge effectiveness measures. This advantage is held without the cost of lowering portfolio return. In addition, there is speculation possibility existing in the portfolio hedged by the traditional optimal hedge ratio and this potential can be detected especially by RHRE.

The optimal hedge strategy of crude oil spot and futures markets: Evidence from a novel method

“…There are some criteria for measuring hedging effect (Liu, 2014), and the most widely used criteria include: (a) Mean of returns, (b) variance of returns, (c) ratio of mean to variance of returns, and (d) hedging effectiveness (HE; Castelino, 1992), as shown in Equation 18: In order to effectively compare the hedging effect for different models, it needs to select appropriate evaluation criteria.…”

“…In order to effectively compare the hedging effect for different models, it needs to select appropriate evaluation criteria. There are some criteria for measuring hedging effect (Liu, 2014), and the most widely used criteria include: (a) Mean of returns, (b) variance of returns, (c) ratio of mean to variance of returns, and (d) hedging effectiveness (HE; Castelino, 1992), as shown in Equation 18:…”

Fatores determinantes do hedge em empresas brasileiras de capital aberto

“…Outras linhas amplamente estudadas tangem às estratégias relacionadas à operação de hedge, como as pesquisas de Hoffman (1931), Working (1953), Gay, Kolb e Chiang (1983), Gomes (1987), Titman (1992), Kawaller (1993), Eun e Resnick (1997), Kimura e Pereira (2005), Liu (2014). Quanto às questões normativas da evidenciação de hedge, pode-se citar Jacque (1981), Costa Junior (2003, Santos et al (2010) e Ambrozini (2014.…”