Optimal Hedge Ratio of Bahar Azadi Coin Futures: Application of Markov Regime Switching Models

Document Type : Original Article

Authors

1 Financial Engineering, Faculty of Industrial Engineering, Islamic Azad University, South Tehran Branch, Iran

2 General Economic Affairs,Faculty of Economics, Kharazmi University, Tehran

Abstract

According to the importance of the hedging of gold coin market fluctuations, the purpose of this study is to estimate the minimize variance of optimal hedge ratios for Bahar Azadi coin futures contracts from period of 2013/12/17 to 2017/06/01 using Markov Switching model and comparison of hedging performance computed by it with other commonly used model in this field. For this purpose Effectiveness of Markov Switching dynamic model of optimal hedge ratios and static optimal hedge ratio of Ordinary Least Square model is compared, in two periods in the sample and out of the sample. The results indicate that in the sample period, the hedge ratio of Markov Switching model had the best performance in terms of reducing variance and increasing utility rates. Also in out of the sample period indicated that the superiority of the Markov Switching model against simple hedge depends on the period and the perspective of the investor.

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