Hedging strategy with futures based on prediction of realized second moment: An application to stock index futures

HAN Li-yan, REN Guang-yu

Systems Engineering - Theory & Practice ›› 2012, Vol. 32 ›› Issue (12) : 2629-2636.

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Systems Engineering - Theory & Practice ›› 2012, Vol. 32 ›› Issue (12) : 2629-2636. DOI: 10.12011/1000-6788(2012)12-2629

Hedging strategy with futures based on prediction of realized second moment: An application to stock index futures

  • HAN Li-yan, REN Guang-yu
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Abstract

Jumps in asset returns bring challenge for hedging decision. This article presents the prediction based VecHAR-RVRCOV-J futures hedging model which allows for jumps. To make the hedging decision, jump variation implied in high-frequency data is integrated for the first time by the new model into the vector heterogeneous autoregressive system for realized second moment of the spot and futures returns. In empirical application, CSI300 futures and its underlying index are used to construct hedging strategy. Both in-sample and out-of-sample performance criteria show that the proposed method is better than conventional bivariate GARCH models.

Key words

dynamic hedging / jump behavior / high-frequency data / VecHAR-RVRCOV-J model / CSI300 futures / heterogeneous beliefs

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HAN Li-yan , REN Guang-yu. Hedging strategy with futures based on prediction of realized second moment: An application to stock index futures. Systems Engineering - Theory & Practice, 2012, 32(12): 2629-2636 https://doi.org/10.12011/1000-6788(2012)12-2629

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