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

Listed author(s):
  • J. L. Ford
  • Wee Ching Pok
  • S. Poshakwale

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.

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Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 06-08.

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Length: 41 pages
Date of creation: Jan 2006
Handle: RePEc:bir:birmec:06-08
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Edgbaston, Birmingham, B15 2TT

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