A Study on Hedging Opportunities of Emerging Market ETFs using Minimum Variance Hedge Ratios and Optimal Portfolio Weights

This study investigated the minimum variance hedge ratio and the weight of the optimal portfolio using the conditional correlation estimated by the DCC-Copula GARCH model for emerging market ETFs traded in the US stock market. The results of empirical analysis during the sample period are as follows. First, When hedging with implied volatility ETF(VXEEM), the most expensive alternative and the emerging market ETF with high hedging efficiency is EWX.. Second, the portfolio weighting strategy is more efficient than the dynamic hedging strategy, and in most portfolios, if the weight of VXEEM is more than 90%, the diversification effect is high. These findings imply that VXEEM can be used to hedge emerging market ETFs exposed to volatility spreads, and suggest that it can be used as important information when analyzing the impact on portfolios on conditional correlations.