publication . Article . 2004

A Markov regime switching approach for hedging stock indices

Amir Alizadeh; Nikos Nomikos;
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  • Published: 05 May 2004 Journal: Journal of Futures Markets, volume 24, pages 649-674 (issn: 0270-7314, eissn: 1096-9934, Copyright policy)
  • Publisher: Wiley
Abstract
In this paper we describe a new approach for determining time‐varying minimum variance hedge ratio in stock index futures markets by using Markov Regime Switching (MRS) models. The rationale behind the use of these models stems from the fact that the dynamic relationship between spot and futures returns may be characterized by regime shifts, which, in turn, suggests that by allowing the hedge ratio to be dependent upon the “state of the market,” one may obtain more efficient hedge ratios and hence, superior hedging performance compared to other methods in the literature. The performance of the MRS hedge ratios is compared to that of alternative models such as GA...
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