Improving hedging performance by using high–low range

Abstract

Intraday high and low prices contain valuable information concerning the inference of daily spot–futures covariance structures. This paper employs the dynamic conditional correlation (DCC) model and price range information to estimate spot–futures hedge ratios. Using tick-by-tick data from the US equity index, we conclude that range-based DCC models outperform the return-based DCC model in terms of out-of-sample realized hedged portfolio variance. The findings may help hedgers construct their hedged portfolios more effectively, particularly during turbulent market phases.