Multivariate GARCH hedge ratios and hedging effectiveness in Australian futures markets
Version of Record online: 31 MAY 2005
Accounting & Finance
Volume 45, Issue 2, pages 301–321, July 2005
How to Cite
Yang, W. and Allen, D. E. (2005), Multivariate GARCH hedge ratios and hedging effectiveness in Australian futures markets. Accounting & Finance, 45: 301–321. doi: 10.1111/j.1467-629x.2004.00119.x
- Issue online: 31 MAY 2005
- Version of Record online: 31 MAY 2005
- Received 22 May 2003; accepted 3 May 2004 by Robert Faff (Editor).
- Hedge ratio;
We use the All Ordinaries Index and the corresponding Share Price Index futures contract written against the All Ordinaries Index to estimate optimal hedge ratios, adopting several specifications: an ordinary least squares-based model, a vector autoregression, a vector error-correction model and a diagonal-vec multivariate generalized autoregressive conditional heteroscedasticity model. Hedging effectiveness is measured using a risk-return comparison and a utility maximization method. We find that time-varying generalized autoregressive conditional heteroscedasticity hedge ratios perform better than constant hedge ratios in terms of minimizing risks, but when return effects are also considered, the utility-based measure prefers the ordinary least squares method in the in-sample hedge, whilst both approaches favour the conditional time-varying multivariate generalized autoregressive conditional heteroscedasticity hedge ratio estimates in out-of-sample analyses.