The effects of structural breaks and long memory on currency hedging

Donald Lien and Li Yang ()

Journal of Futures Markets, 2010, vol. 30, issue 7, 607-632

Abstract: Empirical evidence suggests that unconditional variance of exchange rate return series is subject to occasional structural breaks that may induce spurious phenomenon of high persistence and long memory of volatility processes. In this study, we investigate the effects of such breaks on estimated risk‐minimizing hedge strategies (ratios) and their performance in currency markets. Using bivariate GARCH (BGARCH) and fractionally integrated GARCH models, we estimate the hedge ratios for six foreign currencies in the full sample with and without controlling for breaks and each subsample of different unconditional variance regimes identified by a modified version of the Inclan C, and Tiao GC (1994) algorithm. Our findings suggest that daily currency risk can be better hedged with currency futures when controlling for unconditional variance breaks in the BGARCH model. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:607–632, 2010

Date: 2010
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://hdl.handle.net/

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:30:y:2010:i:7:p:607-632

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().