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Return distribution, leverage effect and spot-futures spread on the hedging effectiveness

Wei-Shun Kao, Chu-Hsiung Lin, Chang-Cheng Changchien and Chien-Hui Wu

Finance Research Letters, 2017, vol. 22, issue C, 158-162

Abstract: This paper proposes a revised Glosten-Jagnnathan-Runkle (GJR) model for estimating hedge ratios. The model can take into account three important characteristics in the return behavior, i.e., fat-tailed distribution, leverage effect, and spot-futures spread. Hedge performance in terms of the White's (2000) reality check is conducted. Our results demonstrate that the generalized autoregressive conditional heteroskedasticity (GARCH) model that considers both fat-tailed distribution and asymmetric effects of the spread provides the best hedging effectiveness for longer horizons.

Keywords: Optimal hedge ratio; Volatility; Spread; Skewed generalized t distribution (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2017
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