The effects of asymmetries on optimal hedge ratios
The effects of asymmetries on optimal hedge ratios
There is widespread evidence that the volatility of stock returns displays an asymmetric response to good and bad news. This article considers the impact of asymmetry on time-varying hedges for financial futures. An asymmetric model that allows forecasts of cash and futures return volatility to respond differently to positive and negative return innovations gives superior in-sample hedging performance. However, the simpler symmetric model is not inferior in a hold-out sample. A method for evaluating the models in a modern risk-management framework is presented, highlighting the importance of allowing optimal hedge ratios to be both time-varying and asymmetric.
333-352
Brooks, Chris
2be5f663-66b8-43d2-903c-6f800e6e2385
Henry, Ólan T.
5cc30498-041e-48ea-8fb9-dfe5e9c131ed
Persand, Gita
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April 2002
Brooks, Chris
2be5f663-66b8-43d2-903c-6f800e6e2385
Henry, Ólan T.
5cc30498-041e-48ea-8fb9-dfe5e9c131ed
Persand, Gita
d60c4b3f-fd3b-4b0a-892f-3c4eb992f15d
Brooks, Chris, Henry, Ólan T. and Persand, Gita
(2002)
The effects of asymmetries on optimal hedge ratios.
Journal of Business, 75 (2), .
Abstract
There is widespread evidence that the volatility of stock returns displays an asymmetric response to good and bad news. This article considers the impact of asymmetry on time-varying hedges for financial futures. An asymmetric model that allows forecasts of cash and futures return volatility to respond differently to positive and negative return innovations gives superior in-sample hedging performance. However, the simpler symmetric model is not inferior in a hold-out sample. A method for evaluating the models in a modern risk-management framework is presented, highlighting the importance of allowing optimal hedge ratios to be both time-varying and asymmetric.
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Published date: April 2002
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Local EPrints ID: 35872
URI: http://eprints.soton.ac.uk/id/eprint/35872
ISSN: 0021-9398
PURE UUID: 7a3e1e88-844c-4c60-a928-aa7f139c4e60
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Date deposited: 23 May 2006
Last modified: 08 Jan 2022 09:58
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Author:
Chris Brooks
Author:
Ólan T. Henry
Author:
Gita Persand
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