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Dynamic Cross Hedging Effectiveness between Gold and Stock Market Based on Downside Risk Measures: Evidence from Iran Emerging Capital Market

Reza Tehrani () and Vahid Veisizadeh ()
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Reza Tehrani : Department of Financial Management, Faculty of Management, University of Tehran
Vahid Veisizadeh : Department of Financial Management, Faculty of Management, University of Tehran

Journal of Money and Economy, 2021, vol. 16, issue 1, 43-70

Abstract: This paper examines the hedging effectiveness of gold futures for the stock market in minimizing variance and downside risks, including value at risk and expected shortfall using data from the Iran emerging capital market during four different sub-periods from December 2008 to August 2018. We employ dynamic conditional correlation models including VARMA-BGARCH (DCC, ADCC, BEKK, and ABEKK) and copula-GARCH with different copula functions to estimate volatilities and conditional correlations between Iran gold futures contract return and Tehran stock exchange main index return. The empirical results reveal that the dynamic conditional correlations switch between positive and near-zero values over the period under study. These correlations are high and positive during the major national currency devaluation and are low near to zero during other times. Out-of-sample one-step-ahead forecasts based on rolling window analysis show that DCC and ADCC multivariate GARCH models outperform other models for variance reduction, while a more interesting finding is that the copula-GARCH model outperforms other models for downside risks reduction.

Keywords: Cross Hedging; Iran Emerging Capital Market; Multivariate GARCH; Copula; Downside Risk. (search for similar items in EconPapers)
JEL-codes: C58 G10 G11 G15 (search for similar items in EconPapers)
Date: 2021
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Handle: RePEc:mbr:jmonec:v:16:y:2021:i:1:p:43-70