Volatility Model Based GARCH Minimum Variance Hedging
Volatility Model Based GARCH Minimum Variance Hedging

Author(s): Haochen Guo
Subject(s): Business Economy / Management, Methodology and research technology
Published by: Masarykova univerzita nakladatelství
Keywords: Volatility Model; GARCH Model; minimum variance; hedge ratio;
Summary/Abstract: In the risk management, volatility as the important parameter for estimation in the issue of hedging. Volatility model is the regression based forecasting model. GARCH (Generalized Autoregressive Conditional Heteroscedasticity) model is one of volatility model, it presents the variance rate at the current time step is a weighted average of a constant long run average variance rate, the variance rate at the previous time steps and the most recent information about the variance rate. Hence, there are many literatures supposed to use the GARCH minimum variance hedging the financial derivatives. Thus, the bivariate GARCH model provides a superior performance to other dynamic or constant hedge for financial derivatives. In the paper, it estimates the minimum variance hedge based on an advanced econometric model (GARCH model) with time varying minimum variance hedge.

• Details
• Contents