Transcription of Optimal Hedging Using Cointegration - Carol …
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Optimal Hedging Using Cointegration - Carol …
R THE ROYAL. igI SOCIETY. Optimal Hedging Using Cointegration BY C. ALEXANDERt School of Mathematics and Statistics, University of Sussex, Falmer BN1 9QH, UK. 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.
Optimal hedging using cointegration measures long-run co-movements in prices, which may occur even through periods when static correlations appear low.
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