Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5090178 | Journal of Banking & Finance | 2010 | 14 Pages |
Abstract
This paper investigates the hedging effectiveness of commodity futures when the correlations of spot and futures returns are subject to multi-state regime shifts. An independent switching dynamic conditional correlation GARCH (IS-DCC) which is free from the problems of path-dependency and recombining is applied to model multi-regime switching correlations. The results of hedging exercises indicate that state-dependent IS-DCC outperforms state-independent DCC GARCH and three-state IS-DCC exhibits superior hedging effectiveness, illustrating importance of modeling higher-state switching correlations for dynamic futures hedging.
Related Topics
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Authors
Hsiang-Tai Lee,