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| Volume 7, No. 3,
December
2008 |
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Wavelet Estimation of
Asymmetric Hedge Ratios:
Does Econometric Sophistication Boost
Hedging Effectiveness? |
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| Elizabeth A.
Maharaj |
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Department of Econometrics and Business Statistics, Monash
University, Australia |
| Imad Moosa |
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Department of Accounting and Finance, Monash University, Australia |
| Jonathan Dark |
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| Department of Finance, University of Melbourne, Australia |
| Param
Silvapulle |
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Department of Econometrics and Business Statistics, Monash
University, Australia |
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| Abstract |
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This paper
utilises wavelet analysis, which is becoming popular in economics
and finance, to estimate the hedge ratios for spot positions on the
West Texas Intermediate crude oil, soybeans and the S&P500 index.
This technique is combined with a two-stage regime switching
threshold model to estimate asymmetric hedge ratios corresponding to
positive and negative returns on futures contracts. Other simple and
sophisticated techniques are also used as a benchmark for the
purpose of comparison, including the naïve model and the asymmetric
error correction GJR-GARCH model. On the basis of the variance ratio
test and variance reduction, it is revealed that econometric
sophistication does not boost hedging effectiveness. |
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| Key
words:
asymmetric hedge ratios; variance ratio; variance reduction;
wavelets |
| JEL
classification:
G30; C22; C53 |
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