Optimal Hedge Ratio Estimation During the Credit Crisis : An Application of Higher Moments

This study aims to investigate and provide further insight into the dynamics of higher moments in the estimation of optimal hedge ratios during the recent credit crisis period by applying the Gram-Charlier expansion series. Furthermore, it compares the performance of the proposed model with conventional hedge ratio methodologies such as: OLS, GARCH and univariate and multivariate GARCH models. The empirical application is performed on spot and futures data on the FTSE 100 and FTSE/ATHEX 20 indices by comparing the in- and out-of-sample hedging effectiveness. The selection of the FTSE/ATHEX 20 index was on the premise that the Greek equity market experienced a prolonged period of extreme movements during the credit crisis period. Overall, the results indicate that the application of the proposed model increases the performance of the hedges in terms of in- and out-of-sample variance reduction