Dynamic hedging performance and downside risk: Evidence from Nikkei index futures

This paper assesses the incremental value of dynamic futures hedging models in minimizing downside risks including value-at-risk, expected shortfall, exponential spectral risk measure and lower partial moment over unconditional hedging approaches. We estimate hedge ratios using dynamic conditional correlation models incorporating high-frequency measures of volatility and correlation under multivariate skewed t-distributions. In the out-of-sample analysis with daily rebalancing and a portfolio hedged with Nikkei 225 futures, the unconditional minimum downside risk approaches perform worse than the proposed conditional approaches. The use of high-frequency measures possibly improves performance of the conditional downside-risk hedging models.