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

Record type: Article

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.

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Citation

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

More information

Published date: 2003
Keywords: hedge ratio, bivariate GARCH, variance

Identifiers

Local EPrints ID: 37453
URI: http://eprints.soton.ac.uk/id/eprint/37453
ISSN: 1042-444X
PURE UUID: 3919ab1d-14dd-4acc-afc9-f6baefda88fc

Catalogue record

Date deposited: 24 May 2006
Last modified: 17 Jul 2017 15:42

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