The main focus of previous research on dynamic futures hedging with GARCH models is restricted to bivariate. This is because the problem of curse of dimension inherent in the multivariate portfolio hedging that creates problems of overparameterization and convergence. This article attempts to apply Independent Component Analysis GARCH (ICA-GARCH) for dynamic futures hedging for foreign exchange data. ICA-GARCH possesses properties of dimension reduction and volatility clustering observed frequently in the financial data and avoids the problems of curse of dimension. Empirical results show that in general ICA-GARCH is not inferior to BEKK-GARCH model out-of-sample for bivariate hedging and for the case of portfolio hedging with more than one currency, the benefits of dimension reduction is getting clearly and moreover, ICA-GARCH consistently outperforms BEKK-GARCH out-of sample.
