Futures hedging with stochastic volatility: a new method

Moawia Alghalith and Christos Floros

International Journal of Computational Economics and Econometrics, 2020, vol. 10, issue 2, 203-207

Abstract: The aim of this paper is to present a continuous-time dynamic model of futures hedging. In particular, we extend the theoretical and empirical literature (e.g., Alghalith, 2016; Alghalith et al., 2015; Corsi et al., 2008) in several important ways. First, we present a theory-based model. A significant empirical contribution is that we do not need data for the basis risk or the spot price. To the best of our knowledge, this is the first paper to assume that the volatility of futures price is stochastic and thus to estimate the volatility of volatility of futures price. Using daily futures data from the S%P500 index, we calculate an average daily volatility as well as the volatility of volatility of futures prices. We recommend that the managers of the futures market should report the stochastic volatility of the futures price (and its volatility), in addition to the traditional volatility.

Keywords: stochastic volatility; volatility of volatility; futures; hedging. (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijcome:v:10:y:2020:i:2:p:203-207

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