Author(s)

D.J. Miller & W.H. Liu

Abstract

We propose a mixed distribution procedure for copula models of the return distribution for hedge portfolios. The marginal distributions of the returns for the spot and futures portfolio components are formed as mixed continuous and discrete distributions based on the empirical distribution function and generalized Pareto tail probability models.We then use a bivariate normal copula model to form the joint distribution of correlated spot and futures returns from the mixed marginal distributions. We apply the proposed method to derive the optimal hedge ratio for equity positions on the Taiwan Stock Exchange (TSE) hedged with the Taiwan Futures Exchange (TAIFEX) contract for the TSE stock index. Keywords: copula, empirical distribution, extreme value, generali

Keywords