Investigate the effectiveness of gold coin dealing to hedge the risk of stock price volatility

Subject Areas : Financial engineering

Soheila Hoghooghi ¹ , Mohammad Ebrahim Aghababaei ²

1 - Department of Financial Engineering, Faculty of Financial Sciences, Kharazmi University, Tehran, Iran.
2 - Department of Financial Management and Financial Engineering, Faculty of Financial Sciences, Kharazmi University, Tehran, Iran.

Received: 2019-12-29 Accepted : 2020-03-24 Published : 2020-06-21

Keywords: Diversification, future, Dynamic hedge ratio, GARCH model (BEKK),

Abstract :

Investors often aim to reduce the risks associated with traditional assets such as investing in equities. The risk of stock price volatility is one of the concerns that always active investors are trying to manage it. Therefore, this research tries to investigate the effectiveness of the hedging stock price volatility methods and its diversification using the gold coin futures. In this study, using monthly data on stock index returns and gold coin future returns between 2008 and 2018, we compare the result’s effectiveness of dynamic hedge ratios using multivariate generalized auto- regressive heteroskedasticity (BEKK-GARCH) and recursive ordinary least square (OLS) methods. The results indicate that the use of the gold coin future is suitable instrument to hedging stock portfolio and the multivariate GARCH method is more effective than the rolling regression method in 5 conditional effectiveness indices, including percentage reduction in variance, percentage reduction in semi-variance, percentage reduction in hedged losses, percentage increase in portfolio excess returns and percentage increase in positive returns.

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