A Multivariate Markov Regime-Switching High-Frequency-Based Volatility Model for Optimal Futures Hedging

摘要

This study proposes a multivariate Markov regime-switching high-frequency-based volatility (MRS-HEAVY) model for modeling the covariance structure of spot and futures returns, and estimating the associated hedge ratios. S&P 500 equity index data are used in estimations, and the results reveal that the MRS-HEAVY model has a shorter response time than that of the Markov regime-switching GARCH model; this difference is more pronounced in the high-volatility regime than in the low-volatility regime. Out-of-sample hedging exercises illustrate that the MRS-HEAVY exhibits superior hedging performance in terms of both variance reductions and utility gains; it is robust even when transaction costs are considered. (c) 2017 Wiley Periodicals, Inc. Jrl Fut Mark 37:1124-1140, 2017