Journal Article

Combining time‐varying and dynamic multi‐period optimal hedging models

Michael S. Haigh and Matthew T. Holt

in European Review of Agricultural Economics

Volume 29, issue 4, pages 471-500
Published in print December 2002 | ISSN: 0165-1587
Published online December 2002 | e-ISSN: 1464-3618 | DOI: https://dx.doi.org/10.1093/eurrag/29.4.471
Combining time‐varying and dynamic multi‐period optimal hedging models

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This paper presents an effective way of combining two distinct approaches used in the hedging literature—dynamic programming (DP) and time‐series (GARCH) econometrics. Theoretically consistent yet realistic and tractable models are developed for traders interested in hedging a portfolio. Results from a bootstrapping experiment used to construct confidence bands around the competing portfolios suggest that, whereas DP–GARCH outperforms the GARCH approach, they are statistically equivalent to the OLS approach when the markets are stable. Traders may achieve significant gains, however, by adopting the DP–GARCH model rather than the OLS approach when markets are volatile.

Keywords: bivariate GARCH; dynamic programming; multi‐period hedging

Journal Article.  0 words. 

Subjects: Agricultural Economics ; Environmental Economics ; Renewable Resources and Conservation ; Primary Products

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