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The cross-currency hedging performance of implied versus statistical forecasting models

Brooks, C. and Chong, J. (2001) The cross-currency hedging performance of implied versus statistical forecasting models. Journal of Futures Markets, 21 (11). pp. 1043-1069. ISSN 1096-9934

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To link to this item DOI: 10.1002/fut.2104

Abstract/Summary

This article examines the ability of several models to generate optimal hedge ratios. Statistical models employed include univariate and multivariate generalized autoregressive conditionally heteroscedastic (GARCH) models, and exponentially weighted and simple moving averages. The variances of the hedged portfolios derived using these hedge ratios are compared with those based on market expectations implied by the prices of traded options. One-month and three-month hedging horizons are considered for four currency pairs. Overall, it has been found that an exponentially weighted moving-average model leads to lower portfolio variances than any of the GARCH-based, implied or time-invariant approaches.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:35960
Publisher:Wiley

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