The hedging effectiveness of global sectors in emerging and developed stock markets

This paper investigates whether global sectors could act as effective hedges for emerging and developed market equities. By comparing the hedging performance of the Global Energy, Financials, Industrials, and Technologies ETFs, we find that the Global Financials ETF (the Global Industrials ETF) is t...

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Bibliographic Details
Published in:International review of economics & finance 2020-03, Vol.66, p.92-117
Main Authors: Jin, Jiayu, Han, Liyan, Wu, Lei, Zeng, Hongchao
Format: Article
Language:English
Subjects:
BRIC markets
Country ETFs
Developed markets
Emerging markets
Hedging effectiveness
Sector ETFs
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Summary:This paper investigates whether global sectors could act as effective hedges for emerging and developed market equities. By comparing the hedging performance of the Global Energy, Financials, Industrials, and Technologies ETFs, we find that the Global Financials ETF (the Global Industrials ETF) is the most desirable hedge for the emerging/BRIC countries ETF (the developed countries ETF). These two sector ETFs provide even higher hedging effectiveness in the crisis period than in the normal period. An evaluation of the hedging effectiveness produced by the DCC, ADCC, and GO-GARCH models suggests that the ADCC model performs best during the crisis period, while the more parsimonious DCC model performs as well as the ADCC model over a longer horizon including both normal and crisis times. These findings have important implications for managing and reducing the systematic risk of equity portfolios.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2019.11.001