Optimal Hedge Ratio Estimation During the Credit Crisis: An Application of Higher Moments

21 Pages Posted: 19 Dec 2012

See all articles by Nicholas Apergis

Nicholas Apergis

University of Piraeus; University of Derby

Alexandros Gabrielsen

Credit Suisse AG

Date Written: October 1, 2012


This study aims to investigate and provide further insight into the dynamics of higher moments in the estimation of optimal hedge ratios during the recent credit crisis period by applying the Gram-Charlier expansion series. Furthermore, it compares the performance of the proposed model with conventional hedge ratio methodologies such as: OLS, GARCH and univariate and multivariate GARCH models. The empirical application is performed on spot and futures data on the FTSE 100 and FTSE/ATHEX 20 indices by comparing the in- and out-of-sample hedging effectiveness. The selection of the FTSE/ATHEX 20 index was on the premise that the Greek equity market experienced a prolonged period of extreme movements during the credit crisis period. Overall, the results indicate that the application of the proposed model increases the performance of the hedges in terms of in- and out-of-sample variance reduction.

Keywords: Optimal hedge ratios, conditional volatility, skewness and kurtosis, higher moments, equity indices

JEL Classification: G13, G10, C32

Suggested Citation

Apergis, Nicholas and Gabrielsen, Alexandros, Optimal Hedge Ratio Estimation During the Credit Crisis: An Application of Higher Moments (October 1, 2012). Frontiers in Finance and Economics, Vol. 9, No. 2, 64-84. Available at SSRN: https://ssrn.com/abstract=2190435

Nicholas Apergis (Contact Author)

University of Piraeus ( email )

Karaoli and Dimitriou 80
Piraeus, Attiki 18534

University of Derby ( email )

Kedleston Road
Derby, Derbyshire DE22 1GB
United Kingdom

Alexandros Gabrielsen

Credit Suisse AG ( email )

GiesshĂĽbelstrasse 40
Zurich, 8002

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