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A copula-based regime-switching GARCH model for optimal futures hedging

✍ Scribed by Hsiang-Tai Lee

Publisher
John Wiley and Sons
Year
2009
Tongue
English
Weight
264 KB
Volume
29
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

The article develops a regime‐switching Gumbel–Clayton (RSGC) copula GARCH model for optimal futures hedging. There are three major contributions of RSGC. First, the dependence of spot and futures return series in RSGC is modeled using switching copula instead of assuming bivariate normality. Second, RSGC adopts an independent switching Generalized Autoregressive Conditional Heteroscedasticity (GARCH) process to avoid the path‐dependency problem. Third, based on the assumption of independent switching, a formula is derived for calculating the minimum variance hedge ratio. Empirical investigation in agricultural commodity markets reveals that RSGC provides good out‐of‐sample hedging effectiveness, illustrating importance of modeling regime shift and asymmetric dependence for futures hedging. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:946–972, 2009

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