[go: up one dir, main page]

  EconPapers    
Economics at your fingertips  
 

Dynamic hedging strategy in incomplete market: Evidence from Shanghai fuel oil futures market

Xiaoqiang Lin, Qiang Chen and Zhenpeng Tang

Economic Modelling, 2014, vol. 40, issue C, 81-90

Abstract: This paper introduces a new incomplete index and establishes a new optimal hedging model. We find that when the market micro-noise is perfectly negatively correlated with the return of futures market, market incompleteness depends on the relative level of noise volatility. Especially when noise volatility is less than the futures market yield, noise volatility will be offset by return volatility. As a result, complete optimal hedging model emerges. As an aside, it is interesting to note that as different conditional variances derived from different volatility models being applied, the hedge performance tends to be basically consistent with subtle difference: DCC–GARCH model is more likely to execute the hedging with 1:1 ratio, while other multivariate GARCH models would give a hedging ratio with greater probability less than 1:1 and is less likely to be a perfect hedge. Therefore, we believe that a simpler econometric model might produce better empirical results.

Keywords: Multivariate GARCH model; Optimal hedge ratio; Market noise conditional volatility (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999314001199
Full text for ScienceDirect subscribers only

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:eee:ecmode:v:40:y:2014:i:c:p:81-90

DOI: 10.1016/j.econmod.2014.03.022

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2024-07-01
Handle: RePEc:eee:ecmode:v:40:y:2014:i:c:p:81-90