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The role of long memory in hedging effectiveness

Coakley, Jerry; Dollery, Jian; Kellard, Neil

Authors

Jerry Coakley

Neil Kellard



Abstract

A joint fractionally integrated, error-correction and multivariate GARCH (FIEC-BEKK) approach is applied to investigate hedging effectiveness using daily data 1995–2005. The findings reveal the proxied error-correction term has a long memory component that theoretically should affect hedging effectiveness. When the FIEC model empirical conditions are satisfied, the FIEC-BEKK hedging strategy outperforms the OLS benchmark out of sample in terms of both variance reduction and hedger utility. A bootstrap exercise indicates that the variance reduction is statistically significant.

Journal Article Type Article
Publication Date Oct 30, 2007
Journal Computational Statistics and Data Analysis
Print ISSN 0167-9473
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 52
Issue 6
Pages 3075 - 3082
APA6 Citation Coakley, J., Dollery, J., & Kellard, N. (2007). The role of long memory in hedging effectiveness. Computational Statistics and Data Analysis, 52(6), 3075 - 3082. https://doi.org/10.1016/j.csda.2007.10.019
DOI https://doi.org/10.1016/j.csda.2007.10.019
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