Extracting Portfolio Management Strategies from Volatility Transmission Models in Regime-changing Environments: Evidence from GCC and Global Markets

Unlike previous studies, this paper uses the Multi-ChainMarkov Switching model (MCMS) to examine portfolio management strategies based on volatility transmission between six domestic stock markets of Gulf Arab states (GCC) and global markets (i.e., the U.S. S&P 500 index and oil prices) and compares the results with those of the VARmodel. Our volatility approach is range-based and not return-basedwhich is traditionally used in estimating the optimal hedge ratios and portfolioweights. The results demonstrate the relative hedging effectiveness of the MCMS model compared to the VAR. We also highlight the time and regime dependency of the optimal hedge ratios and the portfolio weights for each selected pair of the considered markets conditional on the regime of the samemarket and the regimes of the other market. Policy implications on portfolio strategies under different states are also discussed.