ESTIMATING THE HEDGE RATIOS
Abstract
This paper examines the problem of hedging portfolio returns. Many practitioners and academicians endeavor to solve the problem of how to calculate the optimal hedge ratio accurately. In this paper we compare estimates of the hedge ratio from a classical approach of a linear quantile regression, based on selected quantiles as medians, with that of a non-linear quantile regression. To estimate the hedge ratios, we have used a calibrated Student t distribution for the marginal densities and a Student t copula of the portfolio returns using a maximum likelihood estimation. We created two portfolios of the assets, one for equal weight and another for optimal weight in respect of minimal risk. Our findings show that an assumption of Student t marginal leads to a better estimation of the hedge ratio.
References
Alexander, C. (2008). Market risk analysis. Chichester: John Wiley & Sons.
Aymen, B. R. & Mongi, A. (2016). Financial market interdependencies: A quantile regression analysis of volatility spillover. Research in International Business and Finance, 36, 140-157. doi:10.1016/j.ribaf.2015.09.022
Bouyé, E. & Salomon, M. (2002) Dynamic Copula Quantile Regressions and Tail Area Dynamic Dependence in Forex Markets. Working Paper WP03-01, Financial Econometrics Research Centre, Warwick University. Available from http://www2.warwick.ac.uk/fac/soc/wbs/subjects/finance/research/wpaperseries/wp03-01.pdf
Brooks, Ch., Olan, H. T., & Persand, G. (2002). The Effect of Asymmetries on Optimal Hedge Ratios. The Journal of Business, Vol. 75, No. 2, April 2002. Available at SSRN: http://ssrn.com/abstract=305879
Fusion Media Ltd. (n. d.). Stock Prices. Retrieved from http://www.investing.com/indices/germany-30
Finance Yahoo (n. d.). Stock Prices. Retrieved from https://finance.yahoo.com
Koenker, R., & Bassett, G. (1978). Regression quantiles. Econometrica, 46, 33-50
Lien, D., Shrestha, K., & Wu, J. (2016) Quantile Estimation of the Optimal Hedge Ratio. The Journal of Futures Markets, Vol. 36, No. 2, 194–214, 2015 Wiley Periodicals, Inc. Published online 5 March 2015 in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/fut.21712
Copyright information
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License (Creative Commons Attribution License 3.0 - CC BY 3.0) that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
info@iseic.cz, www.iseic.cz, ojs.journals.cz
