Abstract

This study examines the asymmetric dynamic hedging effectiveness the Taiwan stock index futures by extending the concepts of naive hedging effectiveness and dynamic hedging effectiveness proposed by Choudhry (2003). Based on the minimum-variance hedging portfolio, static hedging models and dynamic hedging models are also compared in terms of hedging effectiveness, dynamic hedging effectiveness, hedging effectiveness of dynamic conditional correlation and asymmetric dynamic hedging effectiveness. Experimental results indicate that, there is an asymmetric dynamic hedging effectiveness in the Taiwan stock index futures asymmetric dynamic hedging. Additionally, hedging effectiveness of the dynamic conditional correlation hedging model is better than that of the conditional correlation hedging model. We thus recommend that investors consider the asymmetric dynamic hedging model when constructing the minimum-variance hedging portfolio.

Key words: Futures, hedging, hedging effectiveness, asymmetric dynamic hedging effectiveness.