Multi-Futures Hedging Strategy Based on Markov Regime-Switching Panel GARCH Model

Abstract

This paper first develops a new Markov regime-switching panel GARCH model (MSPG) for multi-futures hedging, which has two merits: First, the panel GARCH model is more parsimonious than multivariate GARCH model. Secondly, the MSPG model allowing for regime shifts which voids the spurious volatility persistence problem. In this article, two-state MSPG model is applied to study the multi-futures hedging, and the comparison of hedging performance with pure panel GARCH is made, which indicates that MSPG model outperforms pure panel GARCH model by superior hedging effectiveness.