Working Papers 2004 – Abstracts
Basis convergence and long memory in volatility when dynamic hedging with SPI futures
Jonathan Dark
This paper examines the importance of basis convergence and long memory in volatility when estimating minimum variance hedge ratios (MVHRs) using SPI futures. The paper employs a bivariate FIGARCH model with a maturity effect to model the joint dynamics of the Australian All Ordinaries Index and the basis. This new approach allows for long memory in volatility, time varying correlations and the convergence between the All Ordinaries Index and its SPI futures over the life of the futures contract. The results illustrate the importance of these effects when modelling the joint dynamics and when estimating dynamic MVHRs.
Keywords: basis convergence, long memory, bivariates FIGARCH, dynamic minimum variance hedge ratios.
