The role of long memory in hedging effectiveness
Jian Dollery and
Computational Statistics & Data Analysis, 2008, vol. 52, issue 6, 3075-3082
A joint fractionally integrated, error-correction and multivariate GARCH (FIEC-BEKK) approach is applied to investigate hedging effectiveness using daily data 1995-2005. The findings reveal the proxied error-correction term has a long memory component that theoretically should affect hedging effectiveness. When the FIEC model empirical conditions are satisfied, the FIEC-BEKK hedging strategy outperforms the OLS benchmark out of sample in terms of both variance reduction and hedger utility. A bootstrap exercise indicates that the variance reduction is statistically significant.
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Persistent link: https://EconPapers.repec.org/RePEc:eee:csdana:v:52:y:2008:i:6:p:3075-3082
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