Time-varying hedging using the State-Space model in the Malaysian equity market

Izani Ibrahim, Sheela Devi D Sundarasen

    Research output: Contribution to journalArticle

    Abstract

    Theoretical and practice of financial hedging have expanded over the last 25 years. Research in this area is numerous and one of them is identifying the time-varying optimal hedge ratio. In this study, the time-varying hedge ratio is analysed using the State Space model (Kalman Filter) on daily Kuala Lumpur Composite Index (KLCI) and Kuala Lumpur Future Index (KLFI) from April 2005 to March 2008. Comparison between the static and time-varying hedge ratio and forecast performance is done to analyse the efficiency of the time-varying estimates. Our results show that for forecasting purposes the State Space model has the ability to forecast better when 30 days of forecast horizon are used. The volatility of the time varying hedge ratio is relatively low, but the static estimate of the hedge ratio overestimates the amount of the KLFI futures contract needed to hedge the KLCI. This may prove to be an unnecessary cost for fund managers in hedging using KLFI.

    Original languageEnglish
    Pages (from-to)65-70
    Number of pages6
    JournalJurnal Pengurusan
    Volume31
    Publication statusPublished - Dec 2010

    Fingerprint

    Hedging
    Time-varying
    State-space model
    Equity markets
    Hedge ratio
    Composite index
    Fund managers
    Optimal hedge ratio
    Hedge
    Forecast performance
    Costs
    Kalman filter
    Futures contracts
    Forecast horizon
    Financial hedging

    ASJC Scopus subject areas

    • Business, Management and Accounting (miscellaneous)
    • Accounting
    • Business and International Management

    Cite this

    Time-varying hedging using the State-Space model in the Malaysian equity market. / Ibrahim, Izani; Sundarasen, Sheela Devi D.

    In: Jurnal Pengurusan, Vol. 31, 12.2010, p. 65-70.

    Research output: Contribution to journalArticle

    Ibrahim, Izani ; Sundarasen, Sheela Devi D. / Time-varying hedging using the State-Space model in the Malaysian equity market. In: Jurnal Pengurusan. 2010 ; Vol. 31. pp. 65-70.
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