Optimal Futures Hedging Decisions in Fractionally Cointegrated Markets
The aim of the chapter is to find a method of obtaining an optimal hedge ratio for utility maximizing investor, who wants to use futures hedging as a hedging vehicle. Different methods of obtaining variance minimizing hedge ratio for risk averse investors are presented. It incorporates nonstationarity of financial time-series, long-run equilibrium relationship and short-run dynamics. Additionally, long memory component was considered in analysis. The study examines different models, which are vector autoregression (VAR), error correction model (ECM) and fractionally error correction model (FIEC). Time series of EUR/PLN spot and futures are considered. The long memory component was found in the basis term and it is expected that FIEC model might better describe the relationship between spot and futures time series and should give better estimates of the hedge ratios. (fragment of text)
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