A Copula-Based Quantile Risk Measure Approach to Estimate the Optimal Hedge Ratio

Journal of Futures Markets, Vol. 34, pp. 658-675, 2014

Posted: 10 Feb 2013 Last revised: 8 Jan 2015

See all articles by Massimiliano Barbi

Massimiliano Barbi

University of Bologna - Department of Management

Silvia Romagnoli

University of Bologna - Department of Statistics

Date Written: February 9, 2013

Abstract

We propose an innovative theoretical model to determine the optimal hedge ratio (OHR) with futures contracts as the minimizer of a quantile risk measure. This class of measures is very large and allows to recover the minimum-VaR and the minimum-expected shortfall hedge ratios as special cases. The copula representation of quantiles yields an accurate and flexible estimation of the dependence structure between the spot and the futures position. Employing data for the main UK and US indices, and EUR/USD and EUR/GBP exchange rates, we investigate the hedging effectiveness of our model compared to that of existing approaches. We document that our model improves upon the hedging performance of minimum-VaR and minimum-expected shortfall hedge ratios, provided that the copula shows an acceptable fit to the data.

Keywords: Optimal hedge ratio, Quantile risk measures, Copula function

JEL Classification: G10, G32

Suggested Citation

Barbi, Massimiliano and Romagnoli, Silvia, A Copula-Based Quantile Risk Measure Approach to Estimate the Optimal Hedge Ratio (February 9, 2013). Journal of Futures Markets, Vol. 34, pp. 658-675, 2014. Available at SSRN: https://ssrn.com/abstract=2214598

Massimiliano Barbi (Contact Author)

University of Bologna - Department of Management ( email )

via Capo di Lucca 34
Bologna, 40126
Italy
+39 051 2098404 (Phone)
+39 051 246411 (Fax)

HOME PAGE: http://www.sites.google.com/site/massimilianobarbifinance/

Silvia Romagnoli

University of Bologna - Department of Statistics ( email )

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