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A copula‐based regime‐switching GARCH model for optimal futures hedging
Author(s) -
Lee HsiangTai
Publication year - 2009
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20394
Subject(s) - copula (linguistics) , futures contract , econometrics , autoregressive conditional heteroskedasticity , economics , heteroscedasticity , autoregressive model , bivariate analysis , mathematics , financial economics , volatility (finance) , statistics
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