Article2007

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

23 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Financial Risk and Volatility Modeling Financial Markets and Investment Strategies Stochastic processes and financial applications

Abstract

Abstract When market returns follow a long memory volatility process, standard approaches to estimating dynamic minimum variance hedge ratios (MVHRs) are misspecified. Simulation results and an application to the S&P 500 index document the magnitude of the misspecification that results from failure to account for basis convergence and long memory in volatility. These results have important implications for the estimation of MVHRs in the S&P 500 example and other markets as well.

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References

1992Testing the null hypothesis of stationarity against the alternative of a unit root 1993Measuring and Testing the Impact of News on Volatility 1993A long memory property of stock market returns and a new model 1988A Capital Asset Pricing Model with Time-Varying Covariances 1996Fractionally integrated generalized autoregressive conditional heteroskedasticity 1979The Hedging Performance of the New Futures Markets 1993Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures 1980Long memory relationships and the aggregation of dynamic models

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