M-GARCH hedge ratios and hedging effectiveness in Australian futures markets [working paper]

Authors

Wenling Yang

Document Type

Other

Publisher

Edith Cowan University

Place of Publication

Joondalup, Western Australia

Faculty

Faculty of Business and Public Management

School

School of Finance and Business Economics

Comments

Yang, W. (2001). M-GARCH hedge ratios and hedging effectiveness in Australian futures markets. Joondalup, Australia: Edith Cowan University.

Abstract

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.