Optimal Futures Hedging Under Multichain Markov Regime Switching |
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| Authors: | Her‐Jiun Sheu Hsiang‐Tai Lee |
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| Affiliation: | Her‐Jiun Sheu and Hsiang‐Tai Lee are Professors in the Department of Banking and Finance, National Chi Nan University, Nantou, Taiwan |
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| Abstract: | Most of the existing Markov regime switching GARCH‐hedging models assume a common switching dynamic for spot and futures returns. In this study, we release this assumption and suggest a multichain Markov regime switching GARCH (MCSG) model for estimating state‐dependent time‐varying minimum variance hedge ratios. Empirical results from commodity futures hedging show that MCSG creates hedging gains, compared with single‐state‐variable regime‐switching GARCH models. Moreover, we find an average of 24% cross‐regime probability, indicating the importance of modeling cross‐regime dynamic in developing optimal futures hedging strategies. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 34:173–202, 2014 |
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