معاملات تامینی با ارز خارجی شاخص سهام معاملات آتی را گرانتر کرده است : شواهدی از شاخص بازار معاملات آتی ام اس سی آی تایوان

To hedge with foreign currency denominated stock index futures, the interdependence of equity, futures, and foreign exchange markets is important in formulating hedging strategies. This also results in divergent optimal hedging strategies for international and domestic investors. We derive and compare optimal hedging strategies for the two types of investors. Evidence from the MSCI Taiwan index futures traded on the SGX shows that both types of investors gain from hedging with the futures contract, while international investors tend to benefit more than domestic investors. This result is robust to various commonly used hedging techniques and sample periods. Moreover, both in-sample and out-of-sample results indicate that a GARCH error-correction model persistently outperforms other hedging techniques.

Emerging stock markets especially in some Far East economies have been experiencing fast-paced real and monetary growth, and continue to attract attention of investors in developed countries who look for opportunities to enhance portfolio performance. However, such markets are noticeably volatile and unpredictable, exposing investors to substantial equity price risk in addition to exchange rate risk. Moreover, an active stock index futures market may not exist in most emerging economies, making foreign equity price risk management more difficult. Recently, a class of innovative derivative instruments have been created to facilitate foreign equity price risk management especially for international investors. An example is the US dollar denominated Morgan Stanley Capital International (MSCI) Taiwan index futures traded on the Derivatives Trading Division of SGX (the Singapore Exchange).1 Since its inception, the index futures has been quite successful, and is one of the most actively traded contracts on the SGX. The unique feature of the MSCI Taiwan index futures is that it is denominated in foreign currency (US dollars), and supposed to hedge equity price risk in Taiwan. This makes risk management strategy of hedging with foreign currency denominated stock index futures different from the conventional approach studied in the finance literature (e.g. Figlewski, 1984, Junkus and Lee, 1985 and Park and Switzer, 1995),2 because the interdependence of equity returns, futures returns, and exchange rate fluctuations becomes an important factor affecting investors’ hedging decisions. More importantly, the interdependence may affect differently the hedging strategies of international and domestic investors. The objective of this article is to evaluate the usefulness of the US dollar denominated MSCI Taiwan index futures for managing equity portfolio risks from the perspectives of both international and domestic investors. Based on the above observations, we derive and compare optimal hedging strategies for both types of investors, and assess in-sample and out-of-sample hedging effectiveness of various hedging techniques, including a GARCH error-correction model, the ordinary least squares (OLS) hedge, the OLS hedge with co-integration (OLS-CI), and a naive hedge. We find that both international and domestic investors gain from hedging with the MSCI Taiwan index futures, while international investors appear to benefit more than domestic investors. We also observe the superiority of the GARCH error-correction model over other hedging techniques for both international and domestic investors. Our result holds true for the entire sample and sub-samples, and is robust to both in-sample and out-of-sample comparisons. These findings have important implications for investors and financial service institutions. First, to hedge with foreign currency denominated index futures, the degree of interdependence of equity, futures, and currency markets should be taken into account in formulating hedging strategies. Second, conditional hedging consistently outperforms other hedging techniques. Third, foreign currency denominated derivatives can succeed in the presence of international investors’ interest in the underlying market. This provides a partial explanation for the high liquidity in the MSCI Taiwan index futures market. Figlewski (1984), Ederington (1979), Junkus and Lee (1985), Ghosh (1993), and Ghosh and Clayton (1996) examine the usefulness of stock index futures in reducing local portfolio risks, and conclude that a stock index futures is an effective tool of risk management for institutional investors. However, these studies focus optimal hedging strategies based on constant hedge models. A large body of literature has established that such models are not as effective as time-varying (conditional) hedge models that take into account all available information when making hedging decisions (e.g. Baillie and Myers, 1991, Myers, 1991, Cecchetti et al., 1988, Park and Switzer, 1995, Gardner and Wuilloud, 1995 and Koutmos and Tucker, 1996). In particular, Kroner and Sultan (1993) show that the bivariate GARCH (1,1) error-correction model is more effective than the conventional OLS and OLS-CI hedging techniques in reducing foreign currency risks. Kroner and Sultan (1993) also show that, allowing for time varying hedge ratios, there is a significant reduction in variances of portfolio returns as compared to using constant hedge ratios. However, the above studies investigate hedging strategies using a futures contract to hedge local asset price risk. In contrast, in this paper we focus on hedging with a foreign currency denominated stock index futures taking into account the interdependence of equity, futures, and foreign exchange markets. Sener (1998) examines optimal hedging strategies by considering the interdependence of equity and currency markets, and finds that currency surprises do affect investors’ hedging decisions. Sener's study focuses on the usefulness of currency forward (futures) for hedging foreign equity portfolio currency risk without considering equity price risk. In contrast, we concentrate on evaluating the usefulness of foreign currency denominated stock index futures—the MSCI Taiwan index futures, for hedging equity price risk from the perspectives of both international and domestic investors. The organisation of the article is as follows. In Section 2, optimal hedge ratios for both international and domestic investors are derived. Section 3 presents the data and empirical procedures. Estimated optimal hedge ratios and the evaluation of hedging effectiveness of various hedging techniques are presented in Section 4. Section 5 concludes.

It is evident that international investors have increased asset holdings in foreign countries especially in the fast growing Asian economies, for the purpose of enhancing profitability. However, this requires investors to effectively manage both equity price risk and exchange rate risk. A foreign currency denominated stock index futures is shown to be useful for managing portfolio risk. This tends to result in divergent optimal hedging strategies for the international and domestic investors due to the perceived comovements of equity, futures, and foreign exchange markets. The evidence from the US dollar denominatedMSCI Taiwan index futures market shows that both international and domestic investors gain from hedging with the futures contract, however, international investors tend to benefit more than domestic investors. The estimated optimal hedge ratio for international investors taking into account the interdependence of equity, futures, and currency markets tends to be larger than that for domestic investors. This result holds true for various hedging techniques in the whole sample as well as sub-samples. We also observe the superiority of the GARCH error-correction model over conventional hedging techniques in reducing portfolio risks for both international and domestic investors. This is attributable to the fact that a conditional hedge model appropriately allows investors to utilise the most updated information when making hedging decisions. Conventional hedging techniques make an over- simplified assumption of a constant variance/covariance matrix between spot and futures prices, leading to sub-optimal hedging decisions. From the out-of-sample results, the advantage of the GARCH error-correction model over other hedging techniques is more pronounced for both international and domestic investors, although international investors appear to benefit more from this hedging strategy than domestic investors. Our results suggest that, to hedge with foreign currency denominated stock index futures, the interdependence of equity, futures, and currency markets becomes an important factor in determining hedging strategies. Moreover, this interdependence can affect differently the optimal hedging strategies of international and domestic investors, resulting in divergent hedging performance for the two types of investors. These results thus have implications for investors to hedge with foreign currency denominated stock index futures. Our findings also imply that, in the presence of international investors’ interest in the underlying market, a foreign currency denominated stock index futures is likely to succeed. This tends to provide an explanation for the perceived liquidity of the MSCI Taiwan index futures contract. The trading volume of the MSCI index futures is also consistently larger than that of Taiwan Stock Exchange Capitalisation Weighted Index (TAIEX) futures contract traded on the Taiwan Futures Exchange. As shown in Fig. 2, on 25 November 1999, the trading volume of the MSCI Taiwan Index futures reached 25 852 contracts, while that of the TAIEX index futures market amounted to only 2756 contracts.