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Dynamic hedging performance and downside risk: Evidence from Nikkei index futures

Masato Ubukata

International Review of Economics & Finance, 2018, vol. 58, issue C, 270-281

Abstract: This paper assesses the incremental value of dynamic futures hedging models in minimizing downside risks including value-at-risk, expected shortfall, exponential spectral risk measure and lower partial moment over unconditional hedging approaches. We estimate hedge ratios using dynamic conditional correlation models incorporating high-frequency measures of volatility and correlation under multivariate skewed t-distributions. In the out-of-sample analysis with daily rebalancing and a portfolio hedged with Nikkei 225 futures, the unconditional minimum downside risk approaches perform worse than the proposed conditional approaches. The use of high-frequency measures possibly improves performance of the conditional downside-risk hedging models.

Keywords: C58; Optimal hedge ratio; Value-at-risk; Expected shortfall; Spectral risk measures; Realized covariance measure (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:reveco:v:58:y:2018:i:c:p:270-281