Cross hedging stock sector risk with index futures by considering the global equity systematic risk

This article investigates the effectiveness of TAIEX (Taiwan Stock Exchange) futures, Taiwan 50 futures, and nonfinance nonelectronics subindex (NFNE) futures for cross hedging the price risk of stock sector indices traded on the Taiwan stock exchange. A state-dependent volatility spillover GARCH he...

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Bibliographic Details
Published in:International journal of financial studies 2018-06, Vol.6 (2), p.1-17
Main Authors: Hsu, Wen-Chung, Lee, Hsiang-Tai
Format: Article
Language:English
Subjects:
cross hedging
Domestic markets
Economic models
Expected utility
Futures
Futures market
GARCH
Hedging
Markov regime switching
multiple futures hedging
multivariate
Securities markets
Stochastic models
Stock exchanges
Volatility
volatility spillover
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Summary:This article investigates the effectiveness of TAIEX (Taiwan Stock Exchange) futures, Taiwan 50 futures, and nonfinance nonelectronics subindex (NFNE) futures for cross hedging the price risk of stock sector indices traded on the Taiwan stock exchange. A state-dependent volatility spillover GARCH hedging strategy is developed to capture the regime switching global equity volatility spillover effect. Empirical results show that the NFNE futures exhibit superior effectiveness as an instrument for hedging stock sector exposures compared with the TAIEX and Taiwan 50 futures. Simultaneous hedge using both NFNE and MSCI (Morgan Stanley Capital International) world index futures further improves the hedging effectiveness compared with the hedging strategy using only the NFNE futures. This shows the importance of hedging the global equity systematic risk of stock sectors by considering the comovement between domestic and global equity markets.
ISSN:2227-7072
2227-7072
DOI:10.3390/ijfs6020044