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

Chris Brooks, James Chong

Research output: Contribution to journalArticle (Academic Journal)peer-review

31 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)1043-1069
Number of pages27
JournalJournal of Futures Markets
Volume21
Issue number11
DOIs
Publication statusPublished - 2001

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