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Optimal Hedging and the Value of News

Author

Listed:
  • Brooks, C.
  • Henry, O.T.
  • Persand, G.

Abstract

There is much evidence in the literature that the volatility of asset returns, in particular those from stock markets, show evidence of an asymmetric response to good and bad news. This paper considers the impact of news on time varying hedges for financial futures. The models are compared with traditional time-invariant hedging models, and those generated from symmetric multivariate GARCH models. Our results show that an asymmetric model allowing the forecasted volatility of the cash and futures prices to be affected differently by good and bad news gives superior in-sample hedging performance. However, the simpler symmetric model yields results which are not inferior in a hold-out sample. A method for evaluating the models in a modern risk management framework is also presented, and again, the importance of allowing optimal hedge ratios to be both time-varying and asymmetric is demonstrated.

Suggested Citation

  • Brooks, C. & Henry, O.T. & Persand, G., 1999. "Optimal Hedging and the Value of News," Department of Economics - Working Papers Series 717, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:717
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    Citations

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    Cited by:

    1. Massimo Giovannini & Margherita Grasso & Alessandro Lanza & Matteo Manera, 2006. "Conditional correlations in the returns on oil companies stock prices and their determinants," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 33(4), pages 193-207, September.
    2. Gita Persand & Chris Brooks, 2003. "Volatility forecasting for risk management," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 22(1), pages 1-22.
    3. G McMillan, David, 2005. "Time-varying hedge ratios for non-ferrous metals prices," Resources Policy, Elsevier, vol. 30(3), pages 186-193, September.
    4. Benavides Guillermo, 2006. "Volatility Forecasts for the Mexican Peso - U.S. Dollar Exchange Rate: An Empirical Analysis of Garch, Option Implied and Composite Forecast Models," Working Papers 2006-04, Banco de México.

    More about this item

    Keywords

    FINANCIAL MARKET ; CAPITAL ; RISK;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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