Title: Correlation asymmetry and implication on hedging

Authors: Abdelwahed Trabelsi; Asma Ennabli

Addresses: BESTMOD Laboratory, Institut Supérieur de Gestion de Tunis, rue de la liberté, cite Bouchoucha, 2000 Bardo, Tunisia ' BESTMOD Laboratory, Institut Supérieur de Gestion de Tunis, rue de la liberté, cite Bouchoucha, 2000 Bardo, Tunisia

Abstract: The paper studies the correlation asymmetry between currency spot and futures returns and its implication on hedging effectiveness using alternative multivariate GARCH models and different hedging strategies. For this purpose, daily data of EUR spot and futures returns are used to present a direct hedging strategy. A cross hedging strategy is also proposed using TND spot and EUR futures returns. Dynamic hedging is implemented using five multivariate GARCH models. The diagonal VECH and BEKK models are chosen among the covariance models. The CC-GARCH, DCC and GDCC represent the correlation models. The empirical results show that correlation between EUR spot and futures returns as well as between TND spot and EUR futures returns exhibit asymmetric behaviour. Moreover, the asymmetric diagonal VECH gives the best performance in terms of portfolio risk reduction in both strategies showing that covariance models are better than correlation models in modelling correlation asymmetry.

Keywords: correlation; multivariate GARCH; asymmetry; derivatives; currency spot and futures returns; hedging effectiveness; hedging strategies; futures hedging; cross hedging.

DOI: 10.1504/IJFMD.2017.086746

International Journal of Financial Markets and Derivatives, 2017 Vol.6 No.1, pp.30 - 56

Received: 04 Oct 2016
Accepted: 10 Mar 2017

Published online: 24 Sep 2017 *

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