Optimal Hedging with the Vector Autoregressive Model

Lukasz Gatarek and Soren Johansen
Additional contact information
Lukasz Gatarek: Erasmus University Rotterdam

No 14-022/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We derive the optimal hedging ratios for a portfolio of assets driven by a Cointegrated Vector Autoregressive model with general cointegration rank. Our hedge is optimal in the sense of minimum variance portfolio. We consider a model that allows for the hedges to be cointegrated with the hedged asset and among themselves. We nd that the minimum variance hedge for assets driven by the CVAR, depends strongly on the portfolio holding period. The hedge is dened as a function of correlation and cointegration parameters. For short holding periods the correlation impact is predominant. For long horizons, the hedge ratio should overweight the cointegration parameters rather then short-run correlation information. In the innite horizon, the hedge ratios shall be equal to the cointegrating vector. The hedge ratios for any intermediate portfolio holding period should be based on the weighted average of correlation and cointegration parameters. The results are general and can be applied for any portfolio of assets that can be modeled by the CVAR of any rank and order.

Keywords: hedging; cointegration; minimum variance portfolio (search for similar items in EconPapers)
JEL-codes: C22 C58 G11 (search for similar items in EconPapers)
Date: 2014-02-18
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://papers.tinbergen.nl/14022.pdf (application/pdf)

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:tin:wpaper:20140022

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().