A simplified approach to modeling the co-movement of asset returns

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A simplified approach to modeling the co-movement of asset returns

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Title: A simplified approach to modeling the co-movement of asset returns
Author: Harris, Richard D. F.
Stoja, Evarist
Tucker, Jon
Citation: Journal of Futures Markets, Vol. 27 (6), p. 575 - 598
Journal: Journal of Futures Markets
Date Issued: 2007
URI: http://hdl.handle.net/10036/48239
DOI: 10.1002/fut.20262
Links: http://www3.interscience.wiley.com/journal/34434/home
Abstract: The authors propose a simplified multivariate GARCH (generalized autoregressive conditional heteroscedasticity) model (the S-GARCH model), which involves the estimation of only univariate GARCH models, both for the individual return series and for the sum and difference of each pair of series. The covariance between each pair of return series is then imputed from these variance estimates. The proposed model is considerably easier to estimate than existing multivariate GARCH models and does not suffer from the convergence problems that characterize many of these models. Moreover, the model can be easily extended to include more complex dynamics or alternative forms of the GARCH specification. The S-GARCH model is used to estimate the minimum-variance hedge ratio for the FTSE (Financial Times and the London Stock Exchange) 100 Index portfolio, hedged using index futures, and compared to four of the most widely used multivariate GARCH models. Using both statistical and economic evaluation criteria, it was found that the S-GARCH model performs at least as well as the other models that were considered, and in some cases it was better.
Type: Article
Description: Author's draft dated October 2004 issued as XFi working paper
Keywords: Multivariate GARCHHedgingFTSE 100 indexMinimum-variance hedge ratio
ISSN: 0270731410969934


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