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Hedging emerging market stock prices with oil, gold, VIX, and bonds: A comparison between DCC, ADCC and GO-GARCH

Syed Basher () and Perry Sadorsky

Energy Economics, 2016, vol. 54, issue C, 235-247

Abstract: While much research uses multivariate GARCH to model volatility dynamics and risk measures, one particular type of multivariate GARCH model, GO-GARCH, has been underutilized. This paper uses DCC, ADCC and GO-GARCH to model volatilities and conditional correlations between emerging market stock prices, oil prices, VIX, gold prices and bond prices. A rolling window analysis is used to construct out-of-sample one-step-ahead forecasts of dynamic conditional correlations and optimal hedge ratios. In most of the situations we study, oil is the best asset to hedge emerging market stock prices. Hedge ratios from the ADCC model are preferred (most effective) for hedging emerging market stock prices with oil, VIX, or bonds. Hedge ratios estimated from the GO-GARCH are most effective for hedging emerging market stock prices with gold in some instances. These results are reasonably robust to choice of model refits, forecast length and distributional assumptions.

Keywords: Emerging market stock prices; DCC-GARCH; GO-GARCH; Oil prices; Hedging (search for similar items in EconPapers)
JEL-codes: G15 Q43 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Hedging emerging market stock prices with oil, gold, VIX, and bonds: A comparison between DCC, ADCC and GO-GARCH (2015) Downloads
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