We would like to thank the Editor (Robert I. Webb), Emanuele Bajo, Umberto Cherubini, and Sabrina Mulinacci for their helpful suggestions. Also, we are indebted to an anonymous referee for providing constructive comments which greatly improved the paper. All errors are our responsibility.
A Copula-Based Quantile Risk Measure Approach to Estimate the Optimal Hedge Ratio
Version of Record online: 4 APR 2013
© 2013 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 34, Issue 7, pages 658–675, July 2014
How to Cite
Barbi, M. and Romagnoli, S. (2014), A Copula-Based Quantile Risk Measure Approach to Estimate the Optimal Hedge Ratio. J. Fut. Mark., 34: 658–675. doi: 10.1002/fut.21617
JEL Classification: G10, G32
- Issue online: 2 JUN 2014
- Version of Record online: 4 APR 2013
- Manuscript Accepted: 1 FEB 2013
- Manuscript Received: 1 AUG 2011
We propose an innovative theoretical model to determine the optimal hedge ratio (OHR) with futures contracts as the minimizer of a quantile risk measure. This class of measures is very large and allows to recover the minimum-VaR and the minimum-expected shortfall hedge ratios as special cases. The copula representation of quantiles yields an accurate and flexible estimation of the dependence structure between the spot and the futures position. Employing data for the main UK and US indices, and EUR/USD and EUR/GBP exchange rates, we investigate the hedging effectiveness of our model compared to that of existing approaches. We document that our model improves upon the hedging performance of minimum-VaR and minimum-expected shortfall hedge ratios, provided that the copula shows an acceptable fit to the data. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:658–675, 2014