Sudden Changes in Variance and Time Varying Hedge Ratios
Michael Smurfit Business School UCD; Jaume I University
Jaume I University
March 24, 2011
This paper analyzes the influence of sudden changes in the unconditional volatility on the estimation and forecast of volatility and its impact on futures hedging strategies. We employ several multivariate GARCH models to estimate the optimal hedge ratios for the Spanish stock market including in each one some well-known patterns that may affect volatility forecasts (asymmetry and sudden changes). The main empirical results show that more complex models including sudden changes in volatility outperform the simpler models in hedging effectiveness both with in-sample and out-of-sample analysis. However, the evidence is stronger when the tail loss distribution is used as a measure for the effectiveness Value at Risk (VaR) and Expected Shortfall (ES) suggesting that traditional measures based on the variance of the hedge portfolio should be used with caution.
Keywords: Finance, Hedging effectiveness, GARCH, sudden changes in varianceworking papers series
Date posted: March 26, 2011
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.469 seconds