Multi-scale Hedge Ratio between the TAIFEX Taiwan Stock Index Futures and TSE Stock Index: An Application of Wavelet Analysis

• Main Authors: Teng-Xian Wang, 王登賢
• Other Authors: Her-Jiun Sheu
• Format: Others
• Language: en_US
• Published: 2007
• Online Access: http://ndltd.ncl.edu.tw/handle/17501482300124999857

碩士 === 國立交通大學 === 管理科學系所 === 95 === This objective of this study is to examine the relationship between the stock and futures markets in terms of lead-lag relationship, correlation, and the hedge ratio using wavelet analysis. We obtain 1,510 observations, from January 2000 to December 2005, from the Taiwan Futures Exchange (TAIFEX). The empirical result shows that: (1) there is a feedback relationship between the stock and futures markets regardless of time scales; (2) wavelet correlation between two markets varies over investment horizons but remains at high level; and (3) hedge ratio and the effectiveness of hedging strategies increase as the wavelet time scale increases. Simulation result also shows that hedging effectiveness depends not only on the time scales but also on the risk aversion coefficient of an individual investor.