A New Model of Minimum Variance Hedge Ratio: EGARCH-Copula-EWMA

Author

Yang Jian-Hui ; Chen Ying-Ying

Author_Institution

Sch. of Bus. Adm., South China Univ. of Technol., Guangzhou, China

fYear

2013

fDate

14-15 Dec. 2013

Firstpage

812

Lastpage

816

Abstract

This paper proposes a new model to calculate minimum variance hedge ratio based on EGARCH-Copula-EWMA model. Based on Minimum variance hedging model, the new model calculates Futures yield rate by EGARCH model and Spot yield rate by EWMA model respectively when it calculates the median correlation coefficient of Futures yield rate and Spot yield rate. The new model make the nonlinear phase-matching of Futures yield rate and Spot yield rate which improve the accuracy of the correlation coefficient in case the price of Futures or spot has large fluctuations. We choose the Aluminum Futures contracts AL1208 and the price of Aluminum spot in the same period to test the model, the effectiveness of the portfolio is 0.7862707, which reduce the risk comparing with non-hedging. The conclusion shows that the model can be used in hedging to lessen the risk of spot price effectively.

Keywords

autoregressive moving average processes; investment; risk management; share prices; stock markets; Aluminum Futures contracts; Aluminum spot price; EGARCH-Copula-EWMA model; Futures yield rate; Spot yield rate; exponential weighted moving average method; median correlation coefficient; minimum variance hedge ratio; nonlinear phase-matching; portfolio; risk reduction; spot price; Correlation coefficient; Equations; Mathematical model; Modeling; Portfolios; Predictive models; Standards; EWMA-Copula-EGARCH model; Futures; Hedge ratio; Spot;

fLanguage

English

Publisher

ieee

Conference_Titel

Computational Intelligence and Security (CIS), 2013 9th International Conference on

Conference_Location

Leshan

Print_ISBN

978-1-4799-2548-3

Type

conf

DOI

10.1109/CIS.2013.177

Filename

6746545