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Investors of Taiwan Stock Market have been long lack of hedging
tools. SIMEX has provided a new merchant, MSCI Taiwan Index
Future on January 9,1997. In addition, Taiwan Futures Exchange
is going to run on July,1998. Though investors are still not
familiar with the new derivatives. Futures will be the new
markets in Taiwan and it is the right time for us to analyze
it. This research use different econometrics methods to check
if it is a good hedge tool for the investors. The results are
as followed.
1. The time series of MSCI Taiwan Index futures ,MSCI Index
Spots and Taiwan Weighted Index are not stationary. They are
integrated of order 1.
2. There exist cointegrations between MSCI Taiwan Index futures
and MSCI Index Spots，in addition to MSCI Taiwan Index futures
and Taiwan Weighted Index.
3. OLS Regression, Error Correction Model and Bivariate GARCH
Model are applied to find the optimal hedge ratio. Among them
,the hedge ratios of Bivariate GARCH Model are dynamic while
the other two are constant.
4. According to the in-sample hedging effects results, the OLS
are outstanding. The low variance of hedging portfolios and the
reduction percentage compared to the no-hedged portfolios prove
that.
5. Investors may care more about the out-sample results. From
the table we know that Error Correction Model and Bivariate
GARCH Model perform better than OLS, especially when the time
period is longer.
6. When we check the RMSE, we get the same conclusion that OLS
is the worst one among the three methods.
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