Hedging Hong Kong stock sectors with gold and commodities using DCC and BEKK

Abstract

This paper investigates the hedging effctiveness of international gold futures and commodity index against different stock sectors in Hong Kong. BEKK-GARCH model and DCC-GARCH model are adopted, and we compare the hedging power of both models and test which one is more effective in constructing hedging portfolios. Our core finding suggests that the BEKK-GARCH model has better performance in terms of constructing hedging portfolio than DCC-GARCH model, even though DCC model was more recently carried out. Also, the return spillover from the past returns of the stock sectors or the hedging instrument is quite limited. But on the other hand, the volatility spillover effects are significant for all series. Another finding is that gold futures and commodity index are effective hedging instruments against stocks in all different industries, because their hedging effectiveness are positive. However, commodity index proves to be a more effective hedging instrument than gold futures when we are constructing a hedging stock portfolio.