Multivariate GARCH hedge ratios and hedging effectiveness in Australian Futures Markets
Document Type
Journal Article
Publisher
Wiley-Blackwell
Faculty
Faculty of Business and Public Management
School
School of Accounting, Finance and Business Economics
RAS ID
3300
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
Comments
Yang, W., & Allen, D. E. (2005). Multivariate GARCH hedge ratios and hedging effectiveness in Australian Futures Markets. Accounting & Finance, 45 (2), 301-321. Available here