COMBINING TIME-VARYING AND DYNAMIC MULTI-PERIOD OPTIMAL HEDGING MODELS

Michael S. Haigh and Matthew Holt

No 28593, Working Papers from University of Maryland, Department of Agricultural and Resource Economics

Abstract: This paper presents an effective way of combining two popular, yet distinct approaches used in the hedging literature - dynamic programming (DP) and time-series (GARCH) econometrics. Theoretically consistent yet realistic and tractable models are developed for traders interested in hedging a portfolio. Results from a bootstrapping experiment used to construct confidence bands around the competing portfolios suggest that while DP-GARCH outperforms the GARCH approach they are statistically equivalent to the OLS approach when the markets are stable. Significant gains may be achieved by a trader, however, by adopting the DP-GARCH model over the OLS approach when markets exhibit excessive volatility.

Keywords: Marketing (search for similar items in EconPapers)
Pages: 48
Date: 2002
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Citations: View citations in EconPapers (1)

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Journal Article: Combining time-varying and dynamic multi-period optimal hedging models (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:umdrwp:28593

DOI: 10.22004/ag.econ.28593

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