Hedge ratio on Markov regime-switching diagonal Bekk-Garch model

China's stock market is known with quick change and violent fluctuation in recent years. This paper develops a Markov regime switching diagonal Bekk-Garch model, enabling parameters to be state dependent upon the regime of market. The empirical results show that different states exist. The high volatility regime has a lower state probability, while the low volatility regime has a higher state probability. The likelihood value show the regime switching diagonal Bekk-Garch model fits the sample better. Both comparisons of hedge performance in and out-of-sample indicate that a regime-switching Bekk-Garch model is the optimal hedge strategy, followed by Bekk-Garch and OLS model. (C) 2017 Elsevier Inc. All rights reserved.