The Effect of Asymmetries on Optimal Hedge Ratios

Chris Brooks, Ólan Henry and Gita Persand
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Gita Persand: University of Bristol

The Journal of Business, 2002, vol. 75, issue 2, 333-352

Abstract: There is widespread evidence that the volatility of stock returns displays an asymmetric response to good and bad news. This article considers the impact of asymmetry on time-varying hedges for financial futures. An asymmetric model that allows forecasts of cash and futures return volatility to respond differently to positive and negative return innovations gives superior in-sample hedging performance. However, the simpler symmetric model is not inferior in a hold-out sample. A method for evaluating the models in a modern risk-management framework is presented, highlighting the importance of allowing optimal hedge ratios to be both time-varying and asymmetric.

Date: 2002
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Citations: View citations in EconPapers (103)

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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:75:y:2002:i:2:p:333-352

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