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Combining Time-Varying and Dynamic Multi-Period Optimal Hedging Models

By Michael S. Haigh Matthew T. Holt, Michael S. Haigh, S. Haigh, Matthew T. Holt, Matthew T. Holt and North Carolina State


This paper presents an effective way of combining two popular, yet distinct approaches used in the hedging literature -- dynamic programming (DP) and time-series (GARCH) econometrics. Theoretically consistent yet realistic and tractable models are developed for traders interested in hedging a portfolio. Results from a bootstrapping experiment used to construct confidence bands around the competing portfolios suggest that while DP-GARCH outperforms the GARCH approach they are statistically equivalent to the OLS approach when the markets are stable. Significant gains may be achieved by a trader, however, by adopting the DP--GARCH model over the OLS approach when markets exhibit excessive volatility

Year: 2002
OAI identifier: oai:CiteSeerX.psu:
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