Ethanol Hedging Strategies Using Dynamic Multivariate GARCH

This paper studies currency risk hedge when volatilities and correlations of forward currency contracts and underlying assets returns are all time-varying.  A multivariate GARCH model with time-varying correlations is adopted to fit the dynamic structure of the conditional volatilities and correlations. The conditional risk-minimizing hedge strategies are estimated for an international portfolio of the US, UK and Switzerland stocks, for the period of February of 1973 to March of 2002. The empirical results show that the optimal dynamic hedging strategies can capture partially the currency fluctuations, and greatly reduce the currency risk and enhance the risk-adjusted returns of the portfolio with significant foreign currency exposures.

Download Full-text

CURRENCY HEDGING STRATEGIES USING MULTIVARIATE GARCH MODELS

Jurnal Teknologi ◽

10.11113/jt.v78.8321 ◽

2016 ◽

Vol 78 (4-4) ◽

Author(s):

Muhammad Azri Mohd ◽

Abdul Halim Mohd Nawawi ◽

Siti Aida Sheikh Hussin ◽

Siti Nurul Ain Ramdzan

Keyword(s):

Exchange Rates ◽

Multivariate Garch ◽

Hedging Strategy ◽

Currency Hedging ◽

Forward Markets ◽

Futures Contract ◽

Hedging Strategies ◽

Multivariate Garch Models ◽

Japanese Yen ◽

Optimal Hedge

Hedging on futures or forward markets is an important tool to reduce risk. Thus, in order to manage the currency risk, it is important to have a suitable hedging strategy. Hedging is a means to offset potential losses on investment by making the second investment, which is expected to move in the opposite way in the financial markets. Therefore, this study aims to identify the relationship between spot and futures contract exchange rates and spot and forwards contract exchange rates. Secondly, calculate the optimal hedge ratio in order for effective optimal portfolio design and hedging strategy using CCC, DCC and Diagonal-BEKK models. The data consist of daily closing prices of spot, futures and 3-month forwards contract for currencies within ASEAN and ASEAN+3 countries. The empirical results revealed that the best model for hedging effectiveness is found to be CCC and DCC. These two models are able to reduce the variance 59.64 percent for Japanese Yen, 97.42 percent for Malaysia Ringgit, 66.14 percent for Singapore Dollar and 93.42 for Philippine Peso. Hence, it can be suggested to investors to hedge Malaysia Ringgit since the currency has the highest reduction in risk.

Download Full-text

Volatility in frontier markets: a Multivariate GARCH analysis

Journal of Advances in Management Research ◽

10.1108/jamr-02-2018-0017 ◽

2019 ◽

Vol 16 (3) ◽

pp. 294-312

Author(s):

Neha Seth ◽

Monica Singhania

Keyword(s):

Financial Distress ◽

Spillover Effect ◽

Multivariate Garch ◽

Volatility Spillover ◽

Causality Test ◽

Content Type ◽

Hedging Strategies ◽

Long Run ◽

Short Run

Purpose The purpose of this paper is to analyze the existence of volatility spillover effect in frontier markets. This study also examines whether any linkages exist among these markets or not. Design/methodology/approach Monthly data of regional frontier markets, from 2009 to 2016, are analyzed using Multivariate GARCH (BEKK and Dynamic Conditional Correlation (DCC)) models. Findings The result of cointegration test shows that the sample frontier markets are not linked in long run, and Granger causality test reveals that the markets under consideration do not cause each other even in the short run. BEKK test says that the effect of the arrival of shock from the own market does not last for longer, whereas shock from other markets lasts with the stronger persistence, and according to DCC test, the volatility spillover exists for all the markets. Practical implications The results of present study suggest that the frontier markets are not cointegrated in the long run as well as in the short run, which opens the doors for long-term investments in these markets in future, which may lead to decent returns. Long-term investors may draw the benefits from including the financial assets in their portfolios from these non-integrated frontier markets; nevertheless, they have to consider and implement diversification and hedging strategies during the period of financial turmoil, so as to protect themselves against economic and financial distress. Originality/value Significant work has been done on developed, developing and emerging markets but frontier markets are not explored much so far. This paper is an attempt to see the status of frontier stock markets as potential financial markets for diversification benefits.

Download Full-text

Crude oil hedging strategies using dynamic multivariate GARCH

Energy Economics ◽

10.1016/j.eneco.2011.01.009 ◽

2011 ◽

Vol 33 (5) ◽

pp. 912-923 ◽

Cited By ~ 128

Author(s):

Chia-Lin Chang ◽

Michael McAleer ◽

Roengchai Tansuchat

Keyword(s):

Crude Oil ◽

Multivariate Garch ◽

Hedging Strategies

Download Full-text

Currency hedging strategies using dynamic multivariate GARCH

Mathematics and Computers in Simulation ◽

10.1016/j.matcom.2012.02.008 ◽

2013 ◽

Vol 94 ◽

pp. 164-182 ◽

Cited By ~ 11

Author(s):

Chia-Lin Chang ◽

Lydia González-Serrano ◽

Juan-Angel Jimenez-Martin

Keyword(s):

Multivariate Garch ◽

Currency Hedging ◽

Hedging Strategies

Download Full-text

Did Brexit change asset co-movements?

Journal of Financial Economic Policy ◽

10.1108/jfep-07-2020-0152 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Shrabani Saha ◽

Anindya Sen ◽

Christine Smith-Han ◽

Dennis Wesselbaum

Keyword(s):

Correlation Matrix ◽

Garch Model ◽

Asset Returns ◽

Multivariate Garch ◽

Financial Assets ◽

Conditional Correlation ◽

Content Type ◽

Hedging Strategies ◽

Multivariate Garch Model ◽

Financial Portfolios

Purpose This paper aims to examine the impact of the Brexit referendum on the risk structure of financial asset prices. Co-movements are analysed using daily price returns of major stock and bond indices as well as commodities and exchange rates from June 2014 to June 2018. The authors used a multivariate GARCH model to study the dynamics of the conditional correlation matrix of asset returns. It was found that the conditional variances and correlations of assets spike on and after the Brexit referendum and then quickly revert to normal levels, suggesting that the effect of the referendum was transient rather than structural. The findings are of interest to investors as co-movements of financial assets can significantly impact financial portfolios and hedging strategies. Design/methodology/approach The authors used a multivariate GARCH model to study the dynamics of the conditional correlation matrix of asset returns. Findings It was found that the conditional variances and correlations of assets spike on and after the Brexit referendum and then quickly revert to normal levels, suggesting that the effect of the referendum was transient rather than structural. Research limitations/implications The findings are of interest to investors as co-movements of financial assets can significantly impact financial portfolios and hedging strategies. Originality/value To the best of the authors’ knowledge, research studying the underlying asset co-movements around Brexit does not exist.

Download Full-text

GOLD HEDGING STRATEGIES IN THE ASIAN MARKETS

Jurnal Teknologi ◽

10.11113/jt.v78.8310 ◽

2016 ◽

Vol 78 (4-4) ◽

Author(s):

Abdul Halim Mohd Nawawi ◽

Nur Hasnedza Radzali ◽

Siti Aida Sheikh Hussin ◽

Muhammad Azri Mohd

Keyword(s):

Financial Crisis ◽

Global Financial Crisis ◽

Minimum Variance ◽

Gold Price ◽

Multivariate Garch ◽

Futures Prices ◽

Significant Drop ◽

Crisis Period ◽

Hedging Strategies ◽

Gold Futures

During 2007, the gold price was declining due to effect from Global Financial Crisis. After this period, gold price suffered significant drop due to low inflation among countries.Hedging is a tool to mitigate risk and uncertainty in gold prices. This research analyzed the relationship between gold spot and futures prices in the Asian markets (Singapore, Thailand, Indonesia, Malaysia, Tokyo, Korea, Shanghai and Hong Kong) and London market. This study also investigated the ability of gold futures as a hedging tool to gold spot during financial market stress. The investigation employed multivariate GARCH and OLS models for optimal hedge ratio estimation of gold futures. Sample data consists of daily gold spot and futures prices denoted in US dollars per troy ounces. There are four sub–periods (Period I, Period II, Period III and Period IV) considered which covers from 2nd February 2009 until 31st October 2014 of 1500 observations. Using Diagonal BEKK model, it can be suggested that one dollar long (buy)in gold spot should be shorted (sold) by about 78.26 cents of Thailand gold futures during the crisis period and Thailand futures market of 74.85 cents for the post crisis period. It can be argued that hedging effectiveness is higher during global financial crisis as compared to post global financial crisis. It is observed that Diagonal BEKK outperformed minimum variance, CCC and DCC models.

Download Full-text

MENGELOLA RESIKO DENGAN PRODUK DERIVATIF

Jurnal Kajian Akuntansi dan Auditing ◽

10.37301/jkaa.v0i0.5365 ◽

2008 ◽

Author(s):

Dandes Rifa

Keyword(s):

Risk Management ◽

Value At Risk ◽

Foreign Currency ◽

Balance Sheet ◽

Cash Flows ◽

Market Risks ◽

Hedging Strategies ◽

Operational Hedging ◽

Potential Risks ◽

Derivative Products

The main objective of risk management is to minimize the potential for losses (risk) arising from unexpected changes in currency rates, credit, commodities and equities. One of the risks faced by companies is market risk (value at risk). This article aims to explain that risk management can be one of them by using derivative products. Derivative transactions is very useful for business people who want to hedge (hedging) against a commodity, which always experience price changes from time to time. There are three strategies that can be used to hedge the balance sheet hedging strategy, operational hedging strategies and contractual hedging strategies. Staregi contractual hedging is a form of protection that is done by forming a contractual hedging instruments in order to provide greater flexibility to managers in managing the potential risks faced by foreign currency. Most of these contractual hedging instrument in the form of derivative products. The management can enhance shareholder value by controlling risk. -Party investors and other interested parties hope that the financial manager is able to identify and manage market risks to be faced. If the value of the firm equals the present value of future cash flows, then risk management can be justified.

Download Full-text