The effect of asymmetries on optimal hedge ratios

There is widespread evidence that the volatility of stock returns displays an asymmetric response to good and bad news. This article considers the impact of asymmetry on time-varying hedges for financial futures. An asymmetric model that allows forecasts of cash and futures return volatility to respond differently to positive and negative return innovations gives superior in-sample hedging performance. However, the simpler symmetric model is not inferior in a hold-out sample. A method for evaluating the models in a modern risk-management framework is presented, highlighting the importance of allowing optimal hedge ratios to be both time-varying and asymmetric.

[1]  R. Kassab,et al.  A word of caution. , 2000, International journal of cardiology.

[2]  Chris Brooks,et al.  A word of caution on calculating market-based minimum capital risk requirements , 2000 .

[3]  K. Kroner,et al.  Modeling Asymmetric Comovements of Asset Returns , 1998 .

[4]  Charles M. S. Sutcliffe,et al.  Stock Index Futures: Theories and International Evidence , 1997 .

[5]  Elroy Dimson,et al.  Stress Tests of Capital Requirements , 1996 .

[6]  Lorne N. Switzer,et al.  Bivariate GARCH estimation of the optimal hedge ratios for stock index futures: A note , 1995 .

[7]  R. Engle,et al.  Multivariate Simultaneous Generalized ARCH , 1995, Econometric Theory.

[8]  Simultaneously determined, time-varying hedge ratios in the soybean complex , 1995 .

[9]  A. StrongRobert,et al.  Forecasting Better Hedge Ratios , 1994 .

[10]  Donald Lien,et al.  Estimating multiperiod hedge ratios in cointegrated markets , 1993 .

[11]  L. Glosten,et al.  On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks , 1993 .

[12]  A. Ghosh.  Cointegration and Error Correction Models: Intertemporal Causality Between Index Spot and Future Prices , 1993 .

[13]  David A. Hsieh,et al.  Implications of Nonlinear Dynamics for Financial Risk Management , 1993, Journal of Financial and Quantitative Analysis.

[14]  A. Hodgson,et al.  AN ALTERNATIVE APPROACH FOR DETERMINING HEDGE RATIOS FOR FUTURES CONTRACTS , 1992 .

[15]  Robert J. Myers,et al.  Bivariate garch estimation of the optimal commodity futures Hedge , 1991 .

[16]  Stephen Figlewski,et al.  Estimation of the Optimal Futures Hedge , 1988 .

[17]  Robert J. Myers,et al.  Generalized Optimal Hedge Ratio Estimation , 1988 .

[18]  S. Johansen.  STATISTICAL ANALYSIS OF COINTEGRATION VECTORS , 1988 .

[19]  J. Wooldridge,et al.  A Capital Asset Pricing Model with Time-Varying Covariances , 1988, Journal of Political Economy.

[20]  C. Granger,et al.  Co-integration and error correction: representation, estimation and testing , 1987 .

[21]  B. Efron.  The jackknife, the bootstrap, and other resampling plans , 1987 .

[22]  B. Efron,et al.  The Jackknife: The Bootstrap and Other Resampling Plans. , 1983 .

[23]  Chris Chatfield,et al.  Introduction to Statistical Time Series. , 1976 .