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Return distribution, leverage effect and spot-futures spread on the hedging effectiveness

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  • Kao, Wei-Shun
  • Lin, Chu-Hsiung
  • Changchien, Chang-Cheng
  • Wu, Chien-Hui

Abstract

This paper proposes a revised Glosten-Jagnnathan-Runkle (GJR) model for estimating hedge ratios. The model can take into account three important characteristics in the return behavior, i.e., fat-tailed distribution, leverage effect, and spot-futures spread. Hedge performance in terms of the White's (2000) reality check is conducted. Our results demonstrate that the generalized autoregressive conditional heteroskedasticity (GARCH) model that considers both fat-tailed distribution and asymmetric effects of the spread provides the best hedging effectiveness for longer horizons.

Suggested Citation

  • Kao, Wei-Shun & Lin, Chu-Hsiung & Changchien, Chang-Cheng & Wu, Chien-Hui, 2017. "Return distribution, leverage effect and spot-futures spread on the hedging effectiveness," Finance Research Letters, Elsevier, vol. 22(C), pages 158-162.
    • Handle: RePEc:eee:finlet:v:22:y:2017:i:c:p:158-162
    DOI: 10.1016/j.frl.2016.12.036
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal hedge ratio; Volatility; Spread; Skewed generalized t distribution;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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