THE BENEFITS OF DYNAMICALLY HEDGING THE TORONTO-35 STOCK INDEX

A growing number of studies reveal that the performance of dynamic hed ging strategies tends to vary across markets, producing large percenta ge reductions in variance in some and seemingly small reductions in ot hers, relative to constant hedges. This paper examines the hedging eff ectiveness 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 improveme nts in risk reduction, compared to static hedging strategies.