Short-Run Derivations and Optimal Hedge Ratio: Evidence from Stock Futures


Choudhry, T. (2003) Short-Run Derivations and Optimal Hedge Ratio: Evidence from Stock Futures. Journal of Multinational Financial Management, 13, (2), 171-192. (doi:10.1016/S1042-444X(02)00042-7).

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Description/Abstract

This paper investigates the effects of the long-run relationship between stock cash index and futures index on the hedging effectiveness of six stock futures markets. Effectiveness of five different hedging ratios depending on different estimation procedures is investigated. The unhedged, the traditional hedge and the minimum variance hedge ratios are all constant while the bivariate GARCH and GARCH-X hedge ratios are time varying. The effectiveness of the hedge ratio is compared by investigating the total sample and the out-of-sample performance of the five ratios. The total sample period consists of daily returns from January 1990 to December 1999. Two out-of-sample periods used are from January 1998 to December 1999 (2 years) and from January 1999 to December 1999 (1 year). Results show that the time-varying hedge ratio outperforms the constant hedge ratio.

Item Type: Article
Related URLs:
Keywords: hedge ratio, bivariate GARCH, variance
Subjects: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions: University Structure - Pre August 2011 > School of Management
ePrint ID: 37453
Date Deposited: 24 May 2006
Last Modified: 27 Mar 2014 18:23
Contact Email Address: t.choudhry@bradford.ac.uk
URI: http://eprints.soton.ac.uk/id/eprint/37453

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