Hedging Global Stock Markets with Bitcoin, Precious Metals, Copper, Crude Oil, and Agricultural Commodities: Evidence from Bivariate Threshold GARCH Approach

Zhuangxing ZHENG; Kai Yin WOO

doi:10.47654/v29y2025i1p35-54

Authors

ZHENG, Zhuangxing Department of Accounting and Finance Hong Kong Polytechnic University, Hong Kong Author
WOO, Kai-yin Department of Economics and Finance, Hong Kong Shue Yan University, Hong Kong Corresponding Author

DOI:

https://doi.org/10.47654/v29y2025i1p35-54

Keywords:

hedge ratio, hedging effectiveness, BEKK-GARCH

Abstract

Purpose: This study examines the effectiveness of hedging global stock markets with hedge assets, including bitcoin, precious metals, copper, crude oil, and agricultural commodities. To achieve this, we selected eleven global stock market indices, including ASX 200, MSCI US, MSCI Europe, MSCI Japan, HSI, IBOVESPA, BSESN, SSECI, STI, TAIEX, and TSXCI to evaluate the effectiveness of hedging with the aforementioned hedge assets. Consequently, our current study offers a more up-to-date and comprehensive comparison of hedging effectiveness among multiple classes of hedge assets than earlier academic work.

Study design/methodology/approach: We collected weekly price data, denominated in USD, from Eikon (https://eikon.refinitiv.com/), covering the period from May 1, 2018, to March 2, 2023. For the analysis, this study utilized the bivariate diagonal BEKK-TGARCH and OLS models to estimate time-varying and static hedge ratios, respectively, with the goal of measuring the effectiveness of hedging.

Findings: In the empirical analysis of the BEKK-TGARCH model, we find that the return spillover effects are weak, and past information shocks influence the current variance-covariances of returns on most hedge assets but not on stock market returns. Moreover, the stock markets exhibit a stronger asymmetric leverage effect than the hedge assets. Furthermore, the BEKK-TGARCH model demonstrates greater hedging effectiveness than the OLS. Silver, copper, and crude oil emerge as highly effective hedge assets, whereas agricultural commodities are the least effective. Finally, ASX 200 and TSXCI are the most effectively hedged stock markets.

Practical Implications: This study evaluates the effectiveness of various hedge assets for hedging global stock markets and identifies the most effective hedge assets. Thus, our research is connected to the field of decision sciences, providing insights into hedging processes and optimal strategies for portfolio managers and hedgers.

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