Template-type: ReDIF-Paper 1.0
Author-Name: Chia-Lin Chang
Author-Email: changchialin@nchu.edu.tw
Author-Person: pch286 
Author-Workplace-Name: Department of Applied Economics, Department of Finance, National Chung Hsing University
	Taichung, Taiwan
Author-Name: Lydia González-Serrano
Author-Workplace-Name: Department of Business Administration Rey Juan Carlos University
Author-Name: Juan-Ángel Jiménez-Martín
Author-Email: juanangel@ccee.ucm.es
Author-Homepage: https://www.ucm.es/fundamentos-analisis-economico2/jajm
Author-Person: pji27 
Author-Workplace-Name: Departamento de Economía Cuantitativa (Department of Quantitative Economics), 
	Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad 
	Complutense de Madrid
Author-Workplace-Homepage: https://www.ucm.es/fundamentos-analisis-economico2
Title: Currency Hedging Strategies Using Dynamic Multivariate GARCH
Abstract: This paper examines the effect on the effectiveness of using futures contracts as hedging
	instruments of: 1) the model of volatility used to estimate conditional variances and
	covariances, 2) the analyzed currency, and 3) the maturity of the futures contract being
	used. For this purpose, daily data of futures and spot exchange rates of three currencies,
	Euro, British pound and Japanese yen, against the American dollar are used to analyze
	hedge ratios and hedging effectiveness resulting from using two different maturity
	currency contracts, near-month and next-to-near-month contract. We estimate four
	multivariate volatility models (CCC, VARMA-AGARCH, DCC and BEKK) and
	calculate optimal portfolio weights and optimal hedge ratios to identify appropriate
	currency hedging strategies. Hedging effectiveness index suggests that the best results
	in terms of reducing the variance of the portfolio are for the USD/GBP exchange rate.
	The results show that futures hedging strategies are slightly more effective when the
	near-month future contract is used for the USD/GBP and USD/JPY currencies.
	Moreover, CCC and AGARCH models provide similar hedging effectiveness although
	some differences appear when the DCC and BEKK models are used.
Classification-JEL: G32, G11, G17, C53, C22.
Keywords: Multivariate GARCH, conditional correlations, exchange rates, optimal hedge ratio, optimal 
	portfolio weights, hedging strategies.
Note: The authors are most grateful for the helpful comments and suggestions of participants at the International 
	Conference on Risk Modelling and Management, Madrid, Spain, June 2011, especially to M. McAleer and T. 
	Pérez Amaral. The second author acknowledges the financial support of the Ministerio de Ciencia y 
	Tecnología and Comunidad de Madrid, Spain.
Length: 36 pages 
Creation-Date: 2011 
Number: 2011-33
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae1133.txt
File-URL: https://eprints.ucm.es/id/eprint/13815/1/1133.pdf
File-Format: Application/pdf
File-Function: October 2011
Handle: RePEc:ucm:doicae:1133