Wavelet Estimation of Asymmetric Hedge Ratios: Does Econometric Sophistication Boost Hedging Effectiveness?

Elizabeth Maharaj (), Imad Moosa, Jonathan Dark and Param Silvapulle
Additional contact information
Imad Moosa: Department of Accounting and Finance, Monash University, Australia
Jonathan Dark: Department of Finance, University of Melbourne, Australia
Param Silvapulle: Department of Econometrics and Business Statistics, Monash University, Australia

International Journal of Business and Economics, 2008, vol. 7, issue 3, 213-230

Abstract: This paper utilises wavelet analysis, which is becoming popular in economics and finance, to estimate the hedge ratios for spot positions on the West Texas Intermediate crude oil, soybeans and the S&P500 index. This technique is combined with a two-stage regime switching threshold model to estimate asymmetric hedge ratios corresponding to positive and negative returns on futures contracts. Other simple and sophisticated techniques are also used as a benchmark for the purpose of comparison, including the naive model and the asymmetric error correction GJR-GARCH model. On the basis of the variance ratio test and variance reduction, it is revealed that econometric sophistication does not boost hedging effectiveness.

Keywords: asymmetric hedge ratios; variance ratio; variance reduction; wavelets (search for similar items in EconPapers)
JEL-codes: C22 C53 G30 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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