Effective methods for hedging downside risk during a global financial crisis: Evidence from asian stock index futures

Chih-Yung Lin*, Po Hsin Ho, Chang Kuo Hu

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

This study investigates futures contracts for five Asian stock indices, namely the Nikkei 225, Kospi 200, MSCI Hong Kong, MSCI Taiwan, and MSCI Singapore indices, using the GARCH, FIGARCH, HYGARCH, and GJR-GARCH models with normal and skewed Student-t innovation distributions. Empirical results indicate that volatility of Asian stock index futures is characterized by long memory. Additionally, owing to the significant parameter estimation of the fat-tail term and the better results obtained via VaR computations based on the Kupiec LR tests, this investigation also confirms that variations in Asian stock index futures exhibit fat tails. Third, empirical results indicate that the HYGARCH model displays superior explanation ability to the other models during insample periods. Fourth, on average, the skewed Student-t GJR-GARCH model outperforms other models during the global financial crisis period. The long memory models thus are not the best models for fitting extreme stock volatility, such as occurred during the global financial crisis period. In contrast, asymmetric models are more suited to fitting the violent stock volatility during the global financial crisis period.

Original languageEnglish
Pages (from-to)191-211
Number of pages21
JournalInternational Research Journal of Finance and Economics
Volume41
StatePublished - 22 Oct 2010

Keywords

  • Asian stock index futures
  • Global financial crisis
  • HYGARCH
  • Kupiec LR tests
  • Long memory
  • VaR

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