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Copula-Based Price Risk Hedging Models

Henry Penikas ()
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Henry Penikas: Higher School of Economics, Russia

Applied Econometrics, 2011, vol. 22, issue 2, pages 3-21

Abstract: The article deals with the issue of copula use in the program of market risk hedging. Copula-models performance is compared to the OLS-based ones. Fully parametric and semi-parametric approaches to copula-modeling are investigated. The copula-based models efficiency is illustrated by the fact of decreasing the daily profit-and-loss volatility of the hedged portfolio by simultaneously augmenting its total yield compared to the OLS-based hedge ratio computation during the back-testing period. Never-the-less, it is shown that copula-based approaches are able to outperform OLS-based ones only for direct hedging programs, while for cross-hedging ones OLS do better

Keywords: copula; direct hedging; cross hedging; hedge ratio (search for similar items in EconPapers)
JEL-codes: C58 D81 G10 (search for similar items in EconPapers)
Date: 2011
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