Premium
Optimal Futures Hedging Under Multichain Markov Regime Switching
Author(s) -
Sheu HerJiun,
Lee HsiangTai
Publication year - 2014
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21583
Subject(s) - futures contract , markov chain , econometrics , economics , autoregressive conditional heteroskedasticity , variance (accounting) , variable (mathematics) , commodity , spot contract , hedge , state variable , financial economics , mathematics , statistics , finance , physics , volatility (finance) , thermodynamics , mathematical analysis , ecology , accounting , biology
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