Currency Hedging Strategies Using Histogram-Valued Data: Bivariate Markov Switching GARCH Models

Previous studies aimed at determining hedging strategies commonly used daily closing spot and futures prices for the analysis and strategy building. However, the daily closing price might not be the appropriate for price in some or all trading days. This is because the intraday data at various minut...

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Autores principales:	Paravee Maneejuk, Nootchanat Pirabun, Suphawit Singjai, Woraphon Yamaka
Formato:	article
Lenguaje:	EN
Publicado:	MDPI AG 2021
Materias:	bivariate Markov switching models copulas currency futures forecasting ability methodology of optimal hedging Mathematics QA1-939
Acceso en línea:	https://doaj.org/article/e0d52d01753940b585e5bfc7f7d1c329
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spelling	oai:doaj.org-article:e0d52d01753940b585e5bfc7f7d1c3292021-11-11T18:18:54ZCurrency Hedging Strategies Using Histogram-Valued Data: Bivariate Markov Switching GARCH Models10.3390/math92127732227-7390https://doaj.org/article/e0d52d01753940b585e5bfc7f7d1c3292021-11-01T00:00:00Zhttps://www.mdpi.com/2227-7390/9/21/2773https://doaj.org/toc/2227-7390Previous studies aimed at determining hedging strategies commonly used daily closing spot and futures prices for the analysis and strategy building. However, the daily closing price might not be the appropriate for price in some or all trading days. This is because the intraday data at various minute intervals, in our view, are likely to better reflect the information about the concrete behavior of the market returns and reactions of the market participants. Therefore, in this study, we propose using high-frequency data along with daily data in an attempt to determine hedging strategies, using five major international currencies against the American dollar. Specifically, in our study we used the 5-min, 30-min, 60-min, and daily closing prices of the USD/CAD (Canadian Dollar), USD/CNY (Chinese Yuan), USD/EUR (Euro), USD/GBP (British Pound), and USD/JPY (Japanese Yen) pairs over the 2018–2019 period. Using data at 5-min, 30-min, and 60-min intervals or high-frequency data, however, means the use of a relatively large number of observations for information extractions in general and econometric model estimations, making data processing and analysis a rather time-consuming and complicated task. To deal with such drawbacks, this study collected the high-frequency data in the form of a histogram and selected the representative daily price, which does not have to be the daily closing value. Then, these histogram-valued data are used for investigating the linear and nonlinear relationships and the volatility of the interested variables by various single- and two-regime bivariate GARCH models. Our results indicate that the Markov Switching Dynamic Copula-Generalized autoregressive conditional heteroskedasticity (GARCH) model performs the best with the lowest BIC and gives the highest overall value of hedging effectiveness (HE) compared with the other models considered in the present endeavor. Consequently, we can conclude that the foreign exchange market for both spot and futures trading has a nonlinear structure. Furthermore, based on the HE results, the best derivatives instrument is CAD using one-day frequency data, while GBP using 30-min frequency data is the best considering the highest hedge ratio. We note that the derivative with the highest hedging effectiveness might not be the one with the highest hedge ratio.Paravee ManeejukNootchanat PirabunSuphawit SingjaiWoraphon YamakaMDPI AGarticlebivariate Markov switching modelscopulascurrency futuresforecasting abilitymethodology of optimal hedgingMathematicsQA1-939ENMathematics, Vol 9, Iss 2773, p 2773 (2021)
institution	DOAJ
collection	DOAJ
language	EN
topic	bivariate Markov switching models copulas currency futures forecasting ability methodology of optimal hedging Mathematics QA1-939
spellingShingle	bivariate Markov switching models copulas currency futures forecasting ability methodology of optimal hedging Mathematics QA1-939 Paravee Maneejuk Nootchanat Pirabun Suphawit Singjai Woraphon Yamaka Currency Hedging Strategies Using Histogram-Valued Data: Bivariate Markov Switching GARCH Models
description	Previous studies aimed at determining hedging strategies commonly used daily closing spot and futures prices for the analysis and strategy building. However, the daily closing price might not be the appropriate for price in some or all trading days. This is because the intraday data at various minute intervals, in our view, are likely to better reflect the information about the concrete behavior of the market returns and reactions of the market participants. Therefore, in this study, we propose using high-frequency data along with daily data in an attempt to determine hedging strategies, using five major international currencies against the American dollar. Specifically, in our study we used the 5-min, 30-min, 60-min, and daily closing prices of the USD/CAD (Canadian Dollar), USD/CNY (Chinese Yuan), USD/EUR (Euro), USD/GBP (British Pound), and USD/JPY (Japanese Yen) pairs over the 2018–2019 period. Using data at 5-min, 30-min, and 60-min intervals or high-frequency data, however, means the use of a relatively large number of observations for information extractions in general and econometric model estimations, making data processing and analysis a rather time-consuming and complicated task. To deal with such drawbacks, this study collected the high-frequency data in the form of a histogram and selected the representative daily price, which does not have to be the daily closing value. Then, these histogram-valued data are used for investigating the linear and nonlinear relationships and the volatility of the interested variables by various single- and two-regime bivariate GARCH models. Our results indicate that the Markov Switching Dynamic Copula-Generalized autoregressive conditional heteroskedasticity (GARCH) model performs the best with the lowest BIC and gives the highest overall value of hedging effectiveness (HE) compared with the other models considered in the present endeavor. Consequently, we can conclude that the foreign exchange market for both spot and futures trading has a nonlinear structure. Furthermore, based on the HE results, the best derivatives instrument is CAD using one-day frequency data, while GBP using 30-min frequency data is the best considering the highest hedge ratio. We note that the derivative with the highest hedging effectiveness might not be the one with the highest hedge ratio.
format	article
author	Paravee Maneejuk Nootchanat Pirabun Suphawit Singjai Woraphon Yamaka
author_facet	Paravee Maneejuk Nootchanat Pirabun Suphawit Singjai Woraphon Yamaka
author_sort	Paravee Maneejuk
title	Currency Hedging Strategies Using Histogram-Valued Data: Bivariate Markov Switching GARCH Models
title_short	Currency Hedging Strategies Using Histogram-Valued Data: Bivariate Markov Switching GARCH Models
title_full	Currency Hedging Strategies Using Histogram-Valued Data: Bivariate Markov Switching GARCH Models
title_fullStr	Currency Hedging Strategies Using Histogram-Valued Data: Bivariate Markov Switching GARCH Models
title_full_unstemmed	Currency Hedging Strategies Using Histogram-Valued Data: Bivariate Markov Switching GARCH Models
title_sort	currency hedging strategies using histogram-valued data: bivariate markov switching garch models
publisher	MDPI AG
publishDate	2021
url	https://doaj.org/article/e0d52d01753940b585e5bfc7f7d1c329
work_keys_str_mv	AT paraveemaneejuk currencyhedgingstrategiesusinghistogramvalueddatabivariatemarkovswitchinggarchmodels AT nootchanatpirabun currencyhedgingstrategiesusinghistogramvalueddatabivariatemarkovswitchinggarchmodels AT suphawitsingjai currencyhedgingstrategiesusinghistogramvalueddatabivariatemarkovswitchinggarchmodels AT woraphonyamaka currencyhedgingstrategiesusinghistogramvalueddatabivariatemarkovswitchinggarchmodels
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Currency Hedging Strategies Using Histogram-Valued Data: Bivariate Markov Switching GARCH Models

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