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Dynamic hedging effectiveness in the Taiwan ETF market: evidence from a DCC-GARCH model

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  • Teng-Tsai Tu
  • Jung-Lieh Hsiao
  • Chun-Chieh Wang

Abstract

This study aims to examine the dynamic hedging effectiveness of Taiwan ETFs market using the DCC-GARCH model. The analysis covers domestic equity ETFs, foreign equity ETFs, and bond and fixed income ETFs in Taiwan. The empirical results indicate that domestic equity ETFs generally exhibit the strongest and most stable hedging effectiveness among all ETF categories. Foreign equity ETFs display more heterogeneous hedging performance. The choice of sample setting influences hedging effectiveness. The same-trading-day setting generally produces stronger hedging performance for domestic and foreign equity ETFs. Hedging effectiveness improves when the hedging horizon is extended. In many cases, the 252-day rolling estimation window generates higher average hedging effectiveness values than the 126-day window. Finally, neither the OLS model nor the DCC-GARCH model consistently dominates across all ETF categories and market conditions. Overall, the results indicate that ETF futures provide substantial risk-reduction benefits in the Taiwan ETF market.

Suggested Citation

  • Teng-Tsai Tu & Jung-Lieh Hsiao & Chun-Chieh Wang, 2026. "Dynamic hedging effectiveness in the Taiwan ETF market: evidence from a DCC-GARCH model," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 10(4), pages 360-382.
    • Handle: RePEc:ids:ijfmkd:v:10:y:2026:i:4:p:360-382
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