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Dynamic model for hedging of the European stock sector with credit default swaps and EURO STOXX 50 volatility index futures

Author

Listed:
  • Rania Zghal
  • Ahmed Ghorbel
  • Mohamed Triki

Abstract

In this paper, the time-varying correlations are estimated for the purpose of examining whether CDS can act as a hedge and safe haven for the European stock sectors. Similarly, the implications for portfolio design are also evaluated on daily and weekly data span bases, concerning the period ranging from December 2007 to September 2017. Overall, the empirical results appear to reveal that the safe haven roles associated with the CDS and the portfolio design prove to differ noticeably across the time horizons as well as from one model to another. Likewise, choosing CDS or VSTOXX futures as hedging instrument seem to depend heavily on data frequency and the models applied. The interest lying behind the conduction of such a study is twofold: on the one hand, it should serve as a guide to investors through enabling them to opt for the most effective strategies useful for hedging the stock sectors' relating risks and, on the other hand, to highlight the models’ specifications associated impacts.

Suggested Citation

  • Rania Zghal & Ahmed Ghorbel & Mohamed Triki, 2018. "Dynamic model for hedging of the European stock sector with credit default swaps and EURO STOXX 50 volatility index futures," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 18(4), pages 312-328, December.
  • Handle: RePEc:bor:bistre:v:18:y:2018:i:4:p:312-328
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    File URL: https://www.sciencedirect.com/science/article/pii/S2214845017301138
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    Citations

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    Cited by:

    1. Balcilar, Mehmet & Ozdemir, Zeynel Abidin & Ozdemir, Huseyin & Wohar, Mark E., 2020. "Spillover effects in oil-related CDS markets during and after the sub-prime crisis," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    2. Huilian Huang & Tao Xiong, 2023. "A good hedge or safe haven? The hedging ability of China's commodity futures market under extreme market conditions," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(7), pages 968-1035, July.
    3. Won Joong Kim & Gunho Jung & Sun-Yong Choi, 2020. "Forecasting CDS Term Structure Based on Nelson–Siegel Model and Machine Learning," Complexity, Hindawi, vol. 2020, pages 1-23, July.
    4. Zainudin, Ahmad Danial & Mohamad, Azhar, 2021. "Cross hedging with stock index futures," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 128-144.

    More about this item

    Keywords

    CDS index; VSTOXX futures; Stock sector; DCC; ADCC; Hedge-safe haven; Optimal hedge ratios; Portfolio variance;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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