On the importance of asymmetries for dynamic hedging during the subprime crisis

Yu-Sheng Lai and Her-Jiun Sheu

Applied Financial Economics, 2011, vol. 21, issue 11, 801-813

Abstract: Asymmetric responses to news in volatilities and correlations are important characteristics of many financial asset returns. This study investigates the asymmetries on spot and futures and extends the work of Kroner and Sultan (1993) using the Asymmetric Dynamic Conditional Correlation (ADCC) model introduced by Cappiello et al. (2006). In particular, the performance of asymmetric hedges during the subprime crisis period is of much interest to investors since futures provide them a convenient tool for managing the market risk. The results on FTSE100 and DAX30 markets show that the ADCC model not only can provide better descriptions on the data, but can also improve the hedging performance for both in-sample and out-of-sample periods, illustrating the importance of modelling asymmetries for futures hedging.

Date: 2011
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DOI: 10.1080/09603107.2010.539535

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