Transcription of Optimal Hedging Using Cointegration - Carol Alexander
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Optimal Hedging Using Cointegration - Carol Alexander
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. With the demand for new quantitative approaches to active investment management strategies there is considerable interest in Cointegration the- ory. This paper presents a model of cointegrated international equity portfolios which is currently used for Hedging within the European, Asian and Far East countries.
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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