Conditional volatility forecasting in a dynamic hedging model

Conditional volatility forecasting in a dynamic hedging model

0.00 Avg rating0 Votes
Article ID: iaor20081020
Country: United Kingdom
Volume: 24
Issue: 3
Start Page Number: 155
End Page Number: 172
Publication Date: Apr 2005
Journal: International Journal of Forecasting
Authors:
Keywords: economics, programming: dynamic
Abstract:

This paper addresses several questions surrounding volatility forecasting and its use in the estimation of optimal hedging ratios. Specifically: Are there economic gains by nesting time-series econometric models (GARCH) and dynamic programming models (therefore forecasting volatility several periods out) in the estimation of hedging ratios whilst accounting for volatility in the futures bid-ask spread? Are the forecasted hedging ratios (and wealth generated) from the nested bid-ask model statistically and economically different than standard approaches? Are there times when a trader following a basic model that does not forecast outperforms a trader using the nested bid-ask model? On all counts the results are encouraging – a trader that accounts for the bid-ask spread and forecasts volatility several periods in the nested model will incur lower transactions costs and gain significantly when the market suddenly and abruptly turns.

Reviews

Required fields are marked *. Your email address will not be published.