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The role of long memory in hedging effectiveness

Jerry Coakley, Jian Dollery and Neil Kellard

Computational Statistics & Data Analysis, 2008, vol. 52, issue 6, 3075-3082

Abstract: 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.

Date: 2008
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