The KOSPI 200 and Dynamic Hedging Effectiveness During the Asian Financial Crisis

This paper focuses on the impact of the 1997 Asian financial market crisis upon hedging effectiveness within the KOSPI 200 stock index and index futures markets. The paper utilizes the inter-temporal relationship between the two markets to examine the characteristics of several minimum variance hedge ratios. It also examines the performances of alternative hedging strategies for dynamic portfolio management in the presence of cointegrated timevarying risks. The results show a decline in the level of conditional volatility within market prices after the crisis. This decline leads to the relative performance of utilizing constant hedge ratios to increase, though not significantly so to guarantee a superior performance over more sophisticated time-varying hedge ratio strategies. * Corresponding Author: Ralf Zurbruegg, School of Banking and Finance, University of New South Wales, NSW 2052, Australia, Tel: (02) 9385 5952, Fax: (02) 9385 6347 email: [email protected]