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Improving hedging performance by using high-low range
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DOI：10.1016/j.frl.2022.102975.png)
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Abstract
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Intraday high and low prices contain valuable information concerning the inference of daily spot-futures covariance structures. This paper employs the dynamic conditional correlation (DCC) model and price range information to estimate spot-futures hedge ratios. Using tick-by-tick data from the US equity index, we conclude that range-based DCC models outperform the return-based DCC model in terms of out-of-sample realized hedged portfolio variance. The findings may help hedgers construct their hedged portfolios more effectively, particularly during turbulent market phases.
Keywords:
covariance forecasting
futures hedge ratio
hedging effectiveness
high-low ranges
realized covariance
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