Edith Cowan University
Place of Publication
Joondalup, Western Australia
Faculty of Business and Public Management
School of Finance and Business Economics
This study estimates optimal hedge ratios using various econometric models. Applying daily AOIs and SPI futures on the Australian market, optimal hedge ratios are calculated from the OLS regression model, the bivariate vector autoregressive model (BVAR), the error-correction model (ECM) and the multivariate diagonal Vec GARCH Model. The hedging effectiveness is measured in terms of ex-post and ex-ante risk-return tradeoff at various forecasting horizons. It is generally found that the GARCH time varying hedge ratios provide the greatest portfolio risk reduction, particularly for longer hedging horizons, but they do not generate the highest portfolio return.