Analysis of optimal hedge ratio and hedging effectiveness in Taiwan stock exchange capitalization weighted stock index (TAIEX) futures

DOI

10.2991/insyma-18.2018.7How to use a DOI?

Keywords

Vector Autoregression (VAR), Vector Error Correction Model (VECM), hedging effectiveness, optimal hedge ratio

Abstract

Theoretically, hedging is effective if there is a balance between the price of asset and price of hedging. The objective of this research was to determine the optimal hedge ratio and hedging effectiveness using Vector Autoregression (VAR) and Vector Error Correction Model (VECM) on TAIEX (Taiwan Stock Exchange Capitalization Weighted Stock Index) Futures. This research provides the conclusion about the more reliable model that can best explain the hedging effectiveness. The daily data were classified into two periods, those are In-Sample Period (January 1st, 2012 - December 31st, 2015) and Out-Sample Period (January 1st- December 31st, 2016) and were collected on spot and futures index market of TAIEX. The results of this study stated that VECM model provides greater variance reduction compared to the VAR model on both in-sample period and out-of-sample period. The conclusion was a VECM model is more reliable to determine hedging effectiveness for managing the risk.

Copyright

© 2018, the Authors. Published by Atlantis Press.

Open Access

This is an open access article distributed under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).

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TY  - CONF
AU  - Jason Aditya Jahja
AU  - Ika Yanuarti Loebiantoro
PY  - 2018/03
DA  - 2018/03
TI  - Analysis of optimal hedge ratio and hedging effectiveness in Taiwan stock exchange capitalization weighted stock index (TAIEX) futures
BT  - Proceedings of the 15th International Symposium on Management (INSYMA 2018)
PB  - Atlantis Press
SP  - 26
EP  - 30
SN  - 2352-5398
UR  - https://doi.org/10.2991/insyma-18.2018.7
DO  - 10.2991/insyma-18.2018.7
ID  - AdityaJahja2018/03
ER  -