Optimal hedge ratios and alternative hedging strategies in the presence of cointegrated time-varying risks

2001 ◽  
Vol 7 (3) ◽  
pp. 269-283 ◽  
Author(s):  
Ah-Boon Sim ◽  
Ralf Zurbruegg
Keyword(s):  
Time Varying ◽  
Hedging Strategies ◽  
Hedge Ratios ◽  
Optimal Hedge

Time-varying distributions and the optimal hedge ratios for stock index futures

1995 ◽  
Vol 5 (3) ◽  
pp. 131-137 ◽  
Author(s):  
Tae H. Park ◽  
Lorne N. Switzer
Keyword(s):  
Stock Index ◽  
Stock Index Futures ◽  
Time Varying ◽  
Index Futures ◽  
Hedge Ratios ◽  
Optimal Hedge

Optimal currency hedge and the carry trade

2020 ◽  
Vol 19 (3) ◽  
pp. 411-427
Author(s):  
Fabio Filipozzi ◽  
Kersti Harkmann
Keyword(s):  
Foreign Currency ◽  
Ordinary Least Squares ◽  
Carry Trade ◽  
Portfolio Risk ◽  
Content Type ◽  
Hedging Strategies ◽  
Hedge Ratios ◽  
Sharpe Ratios ◽  
Optimal Hedge ◽  
Weekly Frequency

Purpose This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds. Design/methodology/approach The simplest strategies of no hedge and fully hedged are compared with the more sophisticated strategies of the ordinary least squares (OLS) approach and the optimal hedge ratios found by the dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity approach. Findings The sophisticated hedging strategies are found to be superior to the simple strategies because they lower the portfolio risk in domestic currency terms and improve the Sharpe ratios for multi-asset portfolios. The analyses also show that both the OLS and dynamic hedging strategies imply holding a limited carry position by being long in high-yielding currencies but short in low-yielding currencies. Originality/value The performance of multi-currency portfolios is examined using more realistic assumptions than in the previous literature, including a weekly frequency and a constraint of no short selling. Furthermore, carry trades are shown to be part of an optimal portfolio.

scholarly journals Optimal Hedging Strategies for Natural Gas

2020 ◽  
Vol 12 (8) ◽  
pp. 1
Author(s):  
Changfeng Zhou ◽  
Huan Cai
Keyword(s):  
Natural Gas ◽  
Crude Oil ◽  
Financial Risk ◽  
Natural Gas Market ◽  
Hedging Strategies ◽  
Hedging Effectiveness ◽  
Hedge Ratios ◽  
Asset Portfolio ◽  
Gas Market ◽  
Optimal Hedge

This study examines the optimal hedge performance between natural gas market and crude oil, ECO, gold and US-bonds markets. To calculate optimal hedge ratios and hedging effectiveness, we apply several multivariate volatility models, namely CCC, DCC, cDCC and bayesDCC. The empirical results show that crude oil is the best asset to hedge natural gas followed by gold and ECO. This is a new result relative to the existing literature on natural gas prices. Additionally, we find that the bayesDCC model has the best performance on optimal hedge ratios (OHRs) calculation in terms of hedging effectiveness. Our findings will hold important financial risk management implications and asset portfolio for those invest in natural gas market.

scholarly journals Commodity Price Correlation And Time Varying Hedge Ratios

2014 ◽  
Vol 30 (4) ◽  
pp. 1053
Author(s):  
Amine Lahiani ◽  
Khaled Guesmi
Keyword(s):  
Stock Market ◽  
Value At Risk ◽  
Price Volatility ◽  
Commodity Price ◽  
Conditional Value At Risk ◽  
Time Varying ◽  
Conditional Correlation ◽  
Dynamic Conditional Correlation ◽  
Hedging Strategies ◽  
Hedge Ratios

<p>This paper examines the price volatility and hedging behavior of commodity futures indices and stock market indices. We investigate the weekly hedging strategies generated by return-based and range-based asymmetric dynamic conditional correlation (DCC) processes. The hedging performances of short and long hedgers are estimated with a semi-variance, low partial moment and conditional value-at-risk. The empirical results show that range-based DCC model outperforms return-based DCC model for most cases.</p>

scholarly journals Determining the effectiveness of optimal time-varying hedge ratios for cattle feeders under multiproduct and single commodity settings

2014 ◽  
Vol 74 (2) ◽  
pp. 217-235
Author(s):  
Hernan Tejeda ◽  
Dillon Feuz
Keyword(s):  
Risk Mitigation ◽  
Estimation Methods ◽  
Time Varying ◽  
Content Type ◽  
Single Time ◽  
Feeder Cattle ◽  
Dynamic Correlations ◽  
Hedge Ratios ◽  
Optimal Hedge ◽  
Single Commodity

Purpose – The purpose of this paper is to determine and contrast the risk mitigating effectiveness from optimal multiproduct time-varying hedge ratios, applied to the margin of a cattle feedlot operation, over single commodity time-varying and naive hedge ratios. Design/methodology/approach – A parsimonious regime-switching dynamic correlations (RSDC) model is estimated in two-stages, where the dynamic correlations among prices of numerous commodities vary proportionally between two different regimes/levels. This property simplifies estimation methods for a large number of parameters involved. Findings – There is significant evidence that resulting simultaneous correlations among the prices (spot and futures) for each commodity attain different levels along the time-series. Second, for in and out-of-sample data there is a substantial reduction in the operation's margin variance provided from both multiproduct and single time-varying optimal hedge ratios over naive hedge ratios. Lastly, risk mitigation is attained at a lower cost given that average optimal multiproduct and single time-varying hedge ratios obtained for corn, feeder cattle and live cattle are significantly below the naive full hedge ratio. Research limitations/implications – The application studied is limited in that once a hedge position has been set at a particular period, it is not possible to modify or update at a subsequent period. Practical implications – Agricultural producers, specifically cattle feeders, may profit from a tool using improved techniques to determine hedge ratios by considering a larger amount of up-to-date information. Moreover, these agents may apply hedge ratios significantly lower than one and thus mitigate risk at lower costs. Originality/value – Feedlot operators will benefit from the potential implementation of this parsimonious RSDC model for their hedging operations, as it provides average optimal hedge ratios significantly lower than one and sizeable advantages in margin risk mitigation.

A revisit to stock market contagion and portfolio hedging strategies

2017 ◽  
Vol 59 (5) ◽  
pp. 618-635 ◽  
Author(s):  
Amanjot Singh ◽  
Manjit Singh
Keyword(s):  
Equity Markets ◽  
Optimal Portfolio ◽  
Portfolio Risk ◽  
Content Type ◽  
Crisis Period ◽  
Hedging Strategies ◽  
Hedge Ratios ◽  
The Us ◽  
Market Contagion ◽  
Optimal Hedge

Purpose This paper aims to attempt to re-capture the stock market contagion effect from the US to the BRIC equity markets during the recent global financial crisis in a multivariate framework. Apart from this, the study also identifies optimal portfolio hedging strategies to minimize the underlying portfolio risk during the period undertaken for the purpose of study. Design/methodology/approach To account for the dynamic interactions, the study uses vector autoregression (p) dynamic conditional correlation (DCC)-asymmetric generalized autoregressive conditional heteroskedastic (1,1) model in a multivariate framework, coupled with a monthly heat map relating to the co-movement between the US and the BRIC equity markets during the period 2007-2009. Finally, by following the studies, Hammoudeh et al. (2010) and Syriopoulos et al. (2015), the time-varying optimal portfolio hedge ratios and weights are computed. Findings The results report a contagion impact of the US subprime crisis (following the collapse of the Lehman Brothers) on the Indian and Russian stock markets only. On the other hand, a higher degree of interdependence between the US and Brazilian market has been observed. The US and Chinese equity markets indicate a relatively lower level of interdependence among themselves. The optimal hedge ratios are found to be most effective for a portfolio comprising the US and Chinese stocks even during the crisis period. A US investor should invest approximately 30 cents in the Indian market and rest of the 70 cents in the US market in a US$1 portfolio to minimize the portfolio risk without lowering the expected returns. During the crisis period (2007-2009), the optimal portfolio weights indicate a higher weightage to the BRIC stocks. Practical implications The results support the construction of optimal US–BRIC stock portfolios and provide an insight to the investors and policy makers both domestic as well as international, with regard to the contagion impact and interdependence, especially during a crisis period. Originality/value The study uses a DCC model in a multivariate framework instead of bivariate, wherein all the markets are factored into a single interaction framework across a very long period (2004-2014). Second, a heat map of monthly correlation combinations has been created for the period 2007-2009, to comprehend the contagion impact or interdependence among the markets. Finally, the study ascertains time-varying optimal hedge ratios and portfolio weights for a two asset portfolio, from a US investor viewpoint, making the study first of its kind in all the perspectives.

Optimal Hedge Ratio and Hedging Effectiveness in Stock Futures Market: Evidence from National Stock Exchange, India

2019 ◽  
Vol 118 (3) ◽  
pp. 137-152
Author(s):  
A. Shanthi ◽  
R. Thamilselvan
Keyword(s):  
Banking Sector ◽  
Stock Exchange ◽  
Research Work ◽  
Futures Market ◽  
Least Square ◽  
Time Varying ◽  
Hedge Ratio ◽  
Hedging Effectiveness ◽  
Out Of Sample ◽  
Optimal Hedge

The major objective of the study is to examine the performance of optimal hedge ratio and hedging effectiveness in stock futures market in National Stock Exchange, India by estimating the following econometric models like Ordinary Least Square (OLS), Vector Error Correction Model (VECM) and time varying Multivariate Generalized Autoregressive Conditional Heteroscedasticity (MGARCH) model by evaluating in sample observation and out of sample observations for the period spanning from 1st January 2011 till 31st March 2018 by accommodating sixteen stock futures retrieved through www.nseindia.com by considering banking sector of Indian economy. The findings of the study indicate both the in sample and out of sample hedging performances suggest the various strategies obtained through the time varying optimal hedge ratio, which minimizes the conditional variance performs better than the employed alterative models for most of the underlying stock futures contracts in select banking sectors in India. Moreover, the study also envisage about the model selection criteria is most important for appropriate hedge ratio through risk averse investors. Finally, the research work is also in line with the previous attempts Myers (1991), Baillie and Myers (1991) and Park and Switzer (1995a, 1995b) made in the US markets

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