Multivariate GARCH Hedge Ratios and Hedging Effectiveness in Australian Futures Markets

21 Pages Posted: 5 Jun 2005

See all articles by Joey Wenling Yang

Joey Wenling Yang

The University of Western Australia - UWA Business School

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

Abstract

We use the All Ordinaries Index and the corresponding Share Price Index futures contract written against the All Ordinaries Index to estimate optimal hedge ratios, adopting several specifications: an ordinary least squares-based model, a vector autoregression, a vector error-correction model and a diagonal-vec multivariate generalized autoregressive conditional heteroscedasticity model. Hedging effectiveness is measured using a risk-return comparison and a utility maximization method. We find that time-varying generalized autoregressive conditional heteroscedasticity hedge ratios perform better than constant hedge ratios in terms of minimizing risks, but when return effects are also considered, the utility-based measure prefers the ordinary least squares method in the in-sample hedge, whilst both approaches favour the conditional time-varying multivariate generalized autoregressive conditional heteroscedasticity hedge ratio estimates in out-of-sample analyses.

JEL Classification: G11, J33

Suggested Citation

Yang, Joey Wenling and Allen, David Edmund, Multivariate GARCH Hedge Ratios and Hedging Effectiveness in Australian Futures Markets. Accounting and Finance, Vol. 45, No. 2, pp. 301-321, July 2005. Available at SSRN: https://ssrn.com/abstract=729464

Joey Wenling Yang (Contact Author)

The University of Western Australia - UWA Business School ( email )

Crawley, Western Australia 6009
Australia

David Edmund Allen

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

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