Evaluating the performance of futures hedging using multivariate realized volatility

Masato Ubukata and Toshiaki Watanabe

Journal of the Japanese and International Economies, 2015, vol. 38, issue C, 148-171

Abstract: This paper investigates the performance of a conditional hedging model using the realized covariance measure (RCM) with noisy high-frequency data. We employ a bivariate realized exponential GARCH (BREG) model with some RCMs to estimate conditional optimal hedge ratios in the Japanese stock and futures markets. The bivariate Student’s t-distribution as well as the bivariate normal distribution are used for the return distribution. The out-of-sample results show that the BREG model outperforms the DCC-EGARCH model and the OLS approach using daily returns for a short hedge in the period without unpredictably large fluctuations in returns such as the Lehman aftermath and the economic impact of the Great East Japan Earthquake. The BREG model with a Student’s t-distribution is likely to be superior to that with a normal distribution. The use of RCMs with methods reducing bias induced by microstructure noise and non-synchronous trading improves the performance. We also find that the joint model of returns and RCM such as the BREG model yields better performance for a short hedge than a model in which RCM is included as an exogenous variable.

Keywords: Realized covariance matrix; Optimal hedge ratio; Conditional hedging model; High-frequency data (search for similar items in EconPapers)
JEL-codes: C58 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:38:y:2015:i:c:p:148-171

DOI: 10.1016/j.jjie.2015.07.001

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