Title

Multivariate GARCH hedge ratios and hedging effectiveness in Australian Futures Markets

Document Type

Journal Article

Publisher

Wiley-Blackwell

Faculty

Business and Public Management

School

Accounting, Finance and Business Economics

RAS ID

3300

Comments

This article was originally published as: Yang, W., & Allen, D. E. (2005). Multivariate GARCH hedge ratios and hedging effectiveness in Australian Futures Markets. Accounting & Finance, 45 (2), 301-321. Original article available here

Abstract

We use the All Ordinaries Index and the corresponding Share Price Index futures contract written against the All Ordinaries Index to estimate optimal hedge ratios, adopting several specifications: an ordinary least squares-based model, a vector autoregression, a vector error-correction model and a diagonal-vec multivariate generalized autoregressive conditional heteroscedasticity model. Hedging effectiveness is measured using a risk-return comparison and a utility maximization method. We find that time-varying generalized autoregressive conditional heteroscedasticity hedge ratios perform better than constant hedge ratios in terms of minimizing risks, but when return effects are also considered, the utility-based measure prefers the ordinary least squares method in the in sample hedge, whilst both approaches favour the conditional time-varying multivariate generalized autoregressive conditional heteroscedasticity hedge ratio estimates in out-of-sample analyses.

DOI

10.1111/j.1467-629x.2004.00119.x

 

Link to publisher version (DOI)

10.1111/j.1467-629x.2004.00119.x