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Dynamic conditional copula correlation and optimal hedge ratios with currency futures

Juha Kotkatvuori-Örnberg

International Review of Financial Analysis, 2016, vol. 47, issue C, 60-69

Abstract: This study investigates efficiency of the futures hedge implemented through the currency markets. The copula DCC-EGARCH model is estimated with the bivariate error correction term to minimize variance of the currency portfolios. The estimation results for the currencies of the Australian dollar, Canadian dollar, euro, British pound and Japanese yen show that the inclusion of the external realized variance estimators into the variance equation of the estimated model improves the model's ability to account for the clustered data variance. In hedging portfolios, the information content of the realized variance estimator effectively reduces the variance of the portfolios.

Keywords: Dynamic conditional correlation; Copula model; Futures hedge; Minimum variance (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:eee:finana:v:47:y:2016:i:c:p:60-69