Journal article
Extracting portfolio management strategies from volatility transmission models in regime-changing environments: Evidence from GCC and global markets
Economic modelling, v 41, pp 365-374
Aug 2014
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
Unlike previous studies, this paper uses the Multi-Chain Markov Switching model (MCMS) to examine portfolio management strategies based on volatility transmission between six domestic stock markets of Gulf Arab states (GCC) and global markets (i.e., the U.S. S&P 500 index and oil prices) and compares the results with those of the VAR model. Our volatility approach is range-based and not return-based which is traditionally used in estimating the optimal hedge ratios and portfolio weights. The results demonstrate the relative hedging effectiveness of the MCMS model compared to the VAR. We also highlight the time and regime dependency of the optimal hedge ratios and the portfolio weights for each selected pair of the considered markets conditional on the regime of the same market and the regimes of the other market. Policy implications on portfolio strategies under different states are also discussed.
•The MCMS model is applied to stock markets of oil exporting countries and oil markets.•Oil exporting countries are Kuwait, Oman, Qatar, Saudi Arabia and UAE (Abu Dhabi and Dubai).•We employ MCMS in- and out-of sample forecasts to demonstrate hedging effectiveness.•Hedging costs vary according to portfolio composition and prevailing regimes.•The hedging effectiveness index favors the MCMS model to the VAR model.
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Details
- Title
- Extracting portfolio management strategies from volatility transmission models in regime-changing environments: Evidence from GCC and global markets
- Creators
- Ahmed A.A. Khalifa - Qatar UniversityShawkat Hammoudeh - Drexel UniversityEdoardo Otranto - University of Messina
- Publication Details
- Economic modelling, v 41, pp 365-374
- Publisher
- Elsevier
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:000339699200041
- Scopus ID
- 2-s2.0-84902479301
- Other Identifier
- 991019167616104721
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- Collaboration types
- Domestic collaboration
- International collaboration
- Web of Science research areas
- Economics