A Markov regime‐switching ARMA approach for hedging stock indices
Chao‐Chun Chen and
Wen-Jen Tsay ()
Journal of Futures Markets, 2011, vol. 31, issue 2, 165-191
This study considers the hedging effectiveness of applying the N‐state Markov regime‐switching autoregressive moving‐average (MRS‐ARMA) model to the S&P‐500 and FTSE‐100 markets. The distinguishingfeature of this study is to incorporate the observations of serially correlated stockreturns into the hedging analysis. To resolve the problem of N-super-T possible routes induced by the presence of MA parameters associated with the algorithm of Hamilton JD ( 1989 ) and a sample of size T, we propose an algorithm by combining the ideas of Hamilton JD ( 1989 ) and Gray SF ( 1996 ). We find that the hedging performances of the three proposed MRS‐MA(1) strategies herein are superior to their corresponding MRS counterparts considered in Alizadeh A and Nomikos N ( 2004 ) over the out‐of‐sample periods, even when we realistically track the transaction costs generated from rebalancing the hedged portfolios. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:165–191, 2011
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:31:y:2011:i:2:p:165-191
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