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Hedging Performance and Stock Market Liquidity: Evidence from the Taiwan Futures Market
Author(s) -
Lee HsiuChuan,
Chien ChengYi
Publication year - 2010
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/j.2041-6156.2010.01015.x
Subject(s) - market liquidity , stock market , economics , econometrics , financial economics , futures contract , stock market index , market maker , liquidity risk , ordinary least squares , liquidity crisis , monetary economics , paleontology , horse , biology
This paper examines the impact of stock market liquidity on the hedging performance of stock index futures, and extends the conditional OLS model described by Miffre [Journal of Futures Markets 24 (2004) 945] by including stock market liquidity in the regression model. The empirical results indicate that information regarding stock market liquidity is useful in predicting the optimal hedge ratio under different market conditions. In a bear market, the conditional OLS model with stock market liquidity provides the best hedging performance for the out‐of‐sample period. Although the OLS model outperforms the generalized autoregressive conditional heteroskedasticity and conditional OLS models for the out‐of‐sample period in a bull market, the conditional OLS model with stock market liquidity outperforms the conditional OLS model without stock market liquidity in terms of downside risks (lower partial moment).