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Hedge ratio on Markov regime-switching diagonal Bekk–Garch model

Yan Zhipeng and Li Shenghong

Finance Research Letters, 2018, vol. 24, issue C, 49-55

Abstract: China's stock market is known with quick change and violent fluctuation in recent years. This paper develops a Markov regime switching diagonal Bekk–Garch model, enabling parameters to be state dependent upon the regime of market. The empirical results show that different states exist. The high volatility regime has a lower state probability, while the low volatility regime has a higher state probability. The likelihood value show the regime-switching diagonal Bekk–Garch model fits the sample better. Both comparisons of hedge performance in and out-of-sample indicate that a regime-switching Bekk–Garch model is the optimal hedge strategy, followed by Bekk–Garch and OLS model.

Keywords: Stock index futures; Hedge ratio; Regime-switching; Garch models (search for similar items in EconPapers)
JEL-codes: C32 C58 G13 G17 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:finlet:v:24:y:2018:i:c:p:49-55