Time-Varying Hedging using the State-Space Model in the Malaysian Equity Market

Izani Ibrahim, Sheela Devi D. Sundarasen

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.

ABSTRAK

Teori dan praktik perlindungan nilai kewangan telah berkembang sejak 25 tahun. Terdapat banyak penyelidikan dalam bidang ini dan salah satunya adalah dalam nisbah perlindungan nilai optima perubahan-masa. Dalam kajian ini, nisbah perlindungan perubahan-masa dikaji dengan menggunakan ruang-keadaan (Penurasan Markov) bagi Indeks Komposit Kuala Lumpur (KLCI) dan Indeks Niaga Hadapan Kuala Lumpur (KLFI) dari April 2005 hingga Mac 2008 . Perbandingan antara nisbah perlindungan statik dan perubahan-masa dianalisis bagi mengkaji tahap efisyen nisbah perlindungan perubahan-masa jangkaan. Keputusan daripada kajian ini menunjukkan bahawa, bagi tujuan ramalan, model ruang-keadaan adalah lebih efisyen untuk jangka masa 30 hari. Kemuarapan nisbah perlindungan perubahan-masa secara relatifnya adalah kecil, dan jangkaan nisbah statik terlebih jangka bilangan kontrak KLFI yang diperlukan untuk melindungi nilai KLCI. Ini mungkin membuktikan kos lebihan yang dapat dielakkan bagi pengurus kewangan bagi merlindungi nilai dengan menggunakan KLFI.


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