Multi‐period hedge ratios for a multi‐asset portfolio when accounting for returns co‐movement

Viviana P. Fernandez

52 citations0/0 files storedJournal of Futures Markets

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Financial Risk and Volatility Modeling Market Dynamics and Volatility Risk Management in Financial Firms

Abstract

Abstract This study presents a model to select the optimal hedge ratios of a portfolio composed of an arbitrary number of commodities. In particular, returns dependency and heterogeneous investment horizons are accounted for by copulas and wavelets, respectively. A portfolio of London Metal Exchange metals is analyzed for the period July 1993–December 2005, and it is concluded that neglecting cross correlations leads to biased estimates of the optimal hedge ratios and the degree of hedge effectiveness. Furthermore, when compared with a multivariate‐GARCH specification, our methodology yields higher hedge effectiveness for the raw returns and their short‐term components. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:182–207, 2008

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References

1999An Introduction to Copulas 2001An Introduction to Statistical Modeling of Extreme Values 2004Copula Methods in Finance 1979The Hedging Performance of the New Futures Markets 1998Understanding Relationships Using Copulas 1988Estimation of the Optimal Futures Hedge 2004A General Approach to Integrated Risk Management with Skewed, Fat-tailed Risks*2004Multiscale systematic risk

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