The role of long memory in hedging effectiveness

Coakley, Jerry; Dollery, Jian; Kellard, Neil

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.

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

• Journal Article Type: Article
• Publication Date: Oct 30, 2007
• Deposit Date: Dec 13, 2019
• Journal: Computational Statistics and Data Analysis
• Print ISSN: 0167-9473
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 52
• Issue: 6
• Pages: 3075 - 3082
• DOI: https://doi.org/10.1016/j.csda.2007.10.019
• Public URL: https://hull-repository.worktribe.com/output/429042