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The effect of asymmetries on optimal hedge ratios

Brooks, C. ORCID: https://orcid.org/0000-0002-2668-1153, Henry, O.T. and Persand, G. (2002) The effect of asymmetries on optimal hedge ratios. Journal of Business, 75 (2). pp. 333-352. ISSN 0740-9168

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Official URL: http://ideas.repec.org/a/ucp/jnlbus/v75y2002i2p333...

Abstract/Summary

There is widespread evidence that the volatility of stock returns displays an asymmetric response to good and bad news. This article considers the impact of asymmetry on time-varying hedges for financial futures. An asymmetric model that allows forecasts of cash and futures return volatility to respond differently to positive and negative return innovations gives superior in-sample hedging performance. However, the simpler symmetric model is not inferior in a hold-out sample. A method for evaluating the models in a modern risk-management framework is presented, highlighting the importance of allowing optimal hedge ratios to be both time-varying and asymmetric.

Item Type:Article
Refereed:No
Divisions:Henley Business School > ICMA Centre
ID Code:24151
Publisher:University of Chicago Press

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