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Basis convergence and long memory in volatility when dynamic hedging with SPI futures

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  • Jonathan Dark

Abstract

This paper examines the importance of basis convergence and long memory in volatility when estimating minimum variance hedge ratios (MVHRs) using SPI futures. The paper employs a bivariate FIGARCH model with a maturity effect to model the joint dynamics of the Australian All Ordinaries Index and the basis. This new approach allows for long memory in volatility, time varying correlations and the convergence between the All Ordinaries Index and its SPI futures over the life of the futures contract. The results illustrate the importance of these effects when modelling the joint dynamics and when estimating dynamic MVHRs.

Suggested Citation

  • Jonathan Dark, 2004. "Basis convergence and long memory in volatility when dynamic hedging with SPI futures," Monash Econometrics and Business Statistics Working Papers 6/04, Monash University, Department of Econometrics and Business Statistics.
    • Handle: RePEc:msh:ebswps:2004-6
    as

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    File URL: http://www.buseco.monash.edu.au/ebs/pubs/wpapers/2004/wp6-04.pdf
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    References listed on IDEAS

    as
    1. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
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    More about this item

    Keywords

    basis convergence; long memory; bivariates FIGARCH; dynamic minimum variance hedge ratios.;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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