Comparing Trading Performance of the Constant and Dynamic Hedge Models: A Note

Sally C Yeh and Gerard L Gannon

Review of Quantitative Finance and Accounting, 2000, vol. 14, issue 2, 155-60

Abstract: The constant and dynamic hedge models, with the presence of transaction costs are compared for the Share Price Index futures contract trading on the Sydney Futures Exchange. The optimal hedge ratio is estimated by using a dynamic, bivariate two-stage model for the return equation with a dynamic GARCH error structure for the conditional hedge ratios. When portfolio projections are compared based on their profit positions (net of transaction costs), the GARCH hedge model dominates the next best competitor in terms of trading profit. Copyright 2000 by Kluwer Academic Publishers

Date: 2000
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