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Incremental Value of a Futures Hedge Using Realized Ranges
Author(s) -
Sheu HerJiun,
Lai YuSheng
Publication year - 2014
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.21614
Subject(s) - futures contract , econometrics , heteroscedasticity , autoregressive model , economics , equity (law) , autoregressive conditional heteroskedasticity , range (aeronautics) , index (typography) , sample (material) , financial economics , computer science , volatility (finance) , materials science , composite material , chemistry , chromatography , world wide web , political science , law
This study investigates the information content of realized ranges for futures hedging. Hedge ratio estimation using generalized autoregressive conditional heteroscedasticity (GARCH) models augmented with intraday price range is proposed. Empirical investigations using the S&P 500 equity index data show that the in‐sample fitting of spot–futures distribution is improved by the information recovered from intraday price ranges. Furthermore, the out‐of‐sample forecasting results show that both the statistical and economic hedging effectiveness increase with the inclusion of intraday price ranges along with intraday and daily price returns. Results indicate that informative realized ranges are valuable for futures hedging. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:676–689, 2014