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2007 Documento de Trabajo #242

Multi-period hedge ratios for a multi-asset portfolio when accounting for returns comovement

This article presents a model to select the optimal hedge ratios of a portfolio comprised of an arbitrary number of commodities. In particular, returns dependency and heterogeneous investment horizons are accounted for by copulas and wavelets, respectively. We analyze a portfolio of London Metal Exchange metals for the period July 1993-December 2005, and conclude that neglecting cross correlations leads to biased estimates of the optimal hedge ratios and the degree of hedge effectiveness. Furthermore, when compared with a multivariate-GARCH specification, our methodology yields higher hedge effectiveness for the raw returns and their short-term components.

Viviana Fernández

Keywords: hedge ratio, multivariate copulas, multivariate GARCH., wavelets