Hedging Italian Equity Mutual Fund Returns during the Recent Financial Turmoil: A Duration-Dependent Markov-Switching Approach
Journal of Applied Finance & Banking, 2013, vol. 3, issue 3, 20
We study optimal hedging design for returns on an Italian equity mutual fund index since 2008. Alternative hedging instruments include one-month futures contracts for FTSE-MIB, FTSE100 and Xetra DAX. We use bivariate models of our Italian equity mutual fund index and each hedging instrument to investigate the performance of optimal static hedges. Our main model is the Markov-switching vector autoregression with duration dependence for the conditional mean of returns proposed by Pegalatti . The hedging performance is then compare with that of standard Dynamic Conditional Correlation models. Our results are twofold. First, DAX futures contracts are the best hedge for Italian equity mutual funds within our class of financial instruments. Second, the duration-dependent Markov-switching model improves on the hedging performance of the competing DCC models.
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Persistent link: https://EconPapers.repec.org/RePEc:spt:apfiba:v:3:y:2013:i:3:f:3_3_20
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