The Benefits of Dynamically Hedging the Toronto 35 Stock Index

Abstract

A growing number of studies reveal that the performance of dynamic hedging strategies tends to vary across markets, producing large percentage reductions in variance in some and seemingly small reductions in others, relative to constant hedges. This paper examines the hedging effectiveness of Toronto 35 index futures and shows that the application of a dynamic strategy based on a general, bivariate GARCH(1,1) process yields economically significant in-sample and out-of-sample improvements in risk reduction, compared to static hedging strategies.