Evaluation of realized multi-power variations in minimum variance hedging

This study investigated the hedging performance of realized multi-power variations under minimum variance strategy. The minimum variance hedge ratios are estimated by the realized DCC-GARCH model, and the risk and utility metrics are used to evaluate the performances of long and short hedge. The empirical results derived from the S&P 500 index demonstrated that the realized DCC-GARCH model with realized tri-power variation outperforms others in reducing risks, and generates largest economic benefits. While considering transaction costs, the superiority of the realized DCC-GARCH model with realized multi-power variations persists and produced less rebalancing costs than the realized DCC-GARCH model with realized variance.