Multi-period hedge ratios for a multi-asset portfolio when accounting for returns co-movement

This study presents a model to select the optimal hedge ratios of a portfolio composed of an arbitrary number of commodities. In particular, returns dependency and heterogeneous investment horizons are accounted for by copulas and wavelets, respectively. A portfolio of London Metal Exchange metals is analyzed for the period July 1993-December 2005, and it is concluded that neglecting cross correlations leads to biased estimates of the optimal hedge ratios and the degree of hedge effectiveness, Furthermore, when compared with a multivariate-GARCH specification, our methodology yields higher hedge effectiveness for the raw returns and their short-term components.