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Dynamic vs. Static Stock Index Futures Hedging: A Case Study for Malaysia

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  • J. L. Ford
  • Wee Ching Pok
  • S. Poshakwale

Abstract

Employing a bivariate GARCH(1,1) process for spot and futures markets returns, this paper determines the structure of the variance-covariance matrix in the BEKK model. Daily data from December 1995 to April 2001 are used for estimation. The differing structures, dynamic, diagonal and constant, are used to obtain hedging ratios which are then used to determine the variance reduction (and expected utility levels) that the alternative ratios produce. This is also accomplished for three sub-periods which accommodate the currency crisis period in Malaysia. Observations from April 2001 to July 2001 are used to evaluate the relative merits of the alternative hedging strategies in forecasting futures returns in Malaysia.

Suggested Citation

  • J. L. Ford & Wee Ching Pok & S. Poshakwale, 2006. "Dynamic vs. Static Stock Index Futures Hedging: A Case Study for Malaysia," Discussion Papers 06-08, Department of Economics, University of Birmingham.
    • Handle: RePEc:bir:birmec:06-08
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    References listed on IDEAS

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    1. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
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