A regime-switching real-time copula GARCH model for optimal futures hedging

Hsiang-Tai Lee and Chien-Chiang Lee ()

International Review of Financial Analysis, 2022, vol. 84, issue C

Abstract: A regime-switching real-time copula GARCH (RSRTCG) model is suggested for optimal futures hedging. The specification of RSRTCG is to model the margins of asset returns with state-dependent real-time GARCH and the dependence structure of asset returns with regime switching copula functions. RSRTCG is faster in adjusting to the new level of volatility under different market regimes which is a regime-switching multivariate generalization of the state-independent univariate real-time GARCH. RSRTCG is applied to cross hedge the price risk of S&P 500 sector indices with crude oil futures. The empirical results show that RSRTCG possesses superior hedging performance compared to its nested non-real-time or state-independent copula GARCH models based on the criterion of percentage variance reduction, utility gain, model confidence set, model combination strategy, risk-adjusted return and reward-to-semivariance ratio.

Keywords: Regime switching; Real-time GARCH; Copula; Dynamic futures hedging (search for similar items in EconPapers)
JEL-codes: C32 C51 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:84:y:2022:i:c:s1057521922003453

DOI: 10.1016/j.irfa.2022.102395

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