A1857
Title: Foreign exchange hedging using a regime-switching model
Authors: Ioannis Moutzouris - City, University of London (United Kingdom)
Nikolaos Papapostolou - City University of London (United Kingdom)
Mahmoud Fatouh - Bank of England (United Kingdom)
Taehyun Lee - City University of London (United Kingdom) [presenting]
Abstract: The research investigates a four-state regime-switching model for optimal foreign exchange hedging using forward contracts with one-, three- and six-month terms for the United States dollar, euro, Japanese yen, Turkish lira and Indian rupee against the pound sterling. The hedging result of the proposed regime-switching model is illustrated, but also compares the figures are compared with the results of other hedging approaches, including two static hedging strategies, nave and ordinary least squares, and two other dynamic methods, the generalised orthogonal generalised autoregressive conditional heteroskedasticity and the Markov regime-switching model. As a result, the proposed model shows the highest level of risk reduction for the United States dollar, euro, Japanese yen and Turkish lira and the second-best performance for the Indian rupee.
