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Comparing the Effectiveness of Traditional and Time Varying Hedge Ratios Using New Zealand and Australian Debt Futures Contracts
Author(s) -
Wilkinson Katherine J.,
Rose Lawrence C.,
Young Martin R.
Publication year - 1999
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1999.tb00464.x
Subject(s) - univariate , futures contract , cointegration , multivariate statistics , hedge , econometrics , debt , error correction model , economics , sample (material) , actuarial science , statistics , financial economics , mathematics , finance , ecology , chemistry , chromatography , biology
We apply cointegration methodology to the New Zealand and Australian 90‐day, three‐year and 10‐year debt and futures markets. We compare traditional methods of calculating hedge ratios with those computed by using univariate and multivariate error correction models. We use out‐of‐sample forecasting to determine which approach is the most effective. Contrary to recent research, our results show that univariate and multivariate error correction models do not outperform more traditional methods of constructing hedges.