Combining time-varying and dynamic multi-period optimal hedging models

Michael S. Haigh and Matthew Holt

European Review of Agricultural Economics, 2002, vol. 29, issue 4, 471-500

Abstract: This paper presents an effective way of combining two distinct approaches used in the hedging literature--dynamic programming (DP) and time-series (GARCH) econometrics. Theoretically consistent yet realistic and tractable models are developed for traders interested in hedging a portfolio. Results from a bootstrapping experiment used to construct confidence bands around the competing portfolios suggest that, whereas DP--GARCH outperforms the GARCH approach, they are statistically equivalent to the OLS approach when the markets are stable. Traders may achieve significant gains, however, by adopting the DP--GARCH model rather than the OLS approach when markets are volatile. Copyright 2002, Oxford University Press.

Date: 2002
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Working Paper: COMBINING TIME-VARYING AND DYNAMIC MULTI-PERIOD OPTIMAL HEDGING MODELS (2002)
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