Optimal hedging using cointegration

Alexander, Carol (1999) Optimal hedging using cointegration. Philosophical Transactions A: Mathematical, Physical and Engineering Sciences, 357 (1758). pp. 2039-2058. ISSN 1471-2962

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Cointegration is a time-series modelling methodology that has many applications to financial markets. When spreads are mean reverting, prices are cointegrated. Then a multivariate model will provide further insight into the price equilibria and returns causalities within the system. Spot–futures arbitrage, yield–curve modelling, index tracking and spread trading are some of the applications of cointegration that are reviewed in this paper. With the demand for new quantitative approaches to active investment management strategies there is considerable interest in cointegration theory. This paper presents a model of cointegrated international equity portfolios which is currently used for hedging within the European, Asian and Far East countries.

Item Type: Article
Keywords: cointegration; hedging; index tracking; financial markets
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HG Finance
Depositing User: Carol Alexander
Date Deposited: 25 Sep 2012 13:36
Last Modified: 25 Sep 2012 13:36
URI: http://srodev.sussex.ac.uk/id/eprint/40591
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