AN EXAMINATION OF DYNAMIC HEDGING

I compare GARCH-modeled dynamic hedging strategies with traditional OL S-modeled strategies to determine which perform better. I find that dy namic hedging reduces risk more than static hedging, but only slightly . This is consistent with some previous findings that more complex hed ging methods may not improve the performance much. Briys and Solnik's (1992) static comparison of the macroeconomic and asset-specific compo nents of the hedge ratio is extended to a dynamic setting to examine h ow the relative importance of these two components evolves through tim e. Cointegrating relationship between the spot and forward rates in th e macroeconomic component is also considered but its effect is minimal . The asset-specific component has effect in the out-of-sample period, especially under dynamic strategies and under short-term hedging hori zons.