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The hedging effectiveness of futures markets : evidence from commodity and stock markets

The hedging effectiveness of futures markets : evidence from commodity and stock markets
The hedging effectiveness of futures markets : evidence from commodity and stock markets

The aim of this study is to investigate the hedging effectiveness of commodity and stock index futures markets. The thesis involves empirical comparison of optimal hedge ratios in stock and commodity futures markets and investigation of whether the short run deviation between cash and futures prices has an effect on hedging. While conducting a comparison between time-varying methods, a comparison is also conducted between the time-varying and the constant method to identify the efficiency for each method involved. The empirical investigation is conducted by comparing the risk reducing ability of several different versions of hedge ratios.

Two main methods of estimating the optimal hedge ratios are used. The first method of estimation is used to estimate the constant hedge ratios. This method includes unhedged, traditional one-to-one hedge, and minimum variance hedge ratios. The second method involves estimating the time varying hedge ratios by means of the bivariate GARCH and bivariate GARCH with cointegration (also known as the GARCH-X model). The commodity markets consist of five different series, while the stock index futures cover seven major developed stock markets in different countries. The commodity and stock markets use daily data for within-sample and two out-of-sample time periods. Cash and futures prices are tested for unit roots and cointegration.

According to Fortune (1989) risk transfer and price discovery also take place in the absence of futures markets but these two factors are enhanced in the presence of futures markets. This occurs because the costs of futures transactions are considerably less than the cost of cash transactions. The five different methods are compared for their hedging effectiveness in enhancing the ability of investors to reduce risk and enhance price discovery, which are the main functions of the futures markets.

University of Southampton
Moftah Alghazali, Idries Omran
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Moftah Alghazali, Idries Omran
f9dc5c6f-6ccd-48f6-99d4-70c8cd3995e8

Moftah Alghazali, Idries Omran (2002) The hedging effectiveness of futures markets : evidence from commodity and stock markets. University of Southampton, Doctoral Thesis.

Record type: Thesis (Doctoral)

Abstract

The aim of this study is to investigate the hedging effectiveness of commodity and stock index futures markets. The thesis involves empirical comparison of optimal hedge ratios in stock and commodity futures markets and investigation of whether the short run deviation between cash and futures prices has an effect on hedging. While conducting a comparison between time-varying methods, a comparison is also conducted between the time-varying and the constant method to identify the efficiency for each method involved. The empirical investigation is conducted by comparing the risk reducing ability of several different versions of hedge ratios.

Two main methods of estimating the optimal hedge ratios are used. The first method of estimation is used to estimate the constant hedge ratios. This method includes unhedged, traditional one-to-one hedge, and minimum variance hedge ratios. The second method involves estimating the time varying hedge ratios by means of the bivariate GARCH and bivariate GARCH with cointegration (also known as the GARCH-X model). The commodity markets consist of five different series, while the stock index futures cover seven major developed stock markets in different countries. The commodity and stock markets use daily data for within-sample and two out-of-sample time periods. Cash and futures prices are tested for unit roots and cointegration.

According to Fortune (1989) risk transfer and price discovery also take place in the absence of futures markets but these two factors are enhanced in the presence of futures markets. This occurs because the costs of futures transactions are considerably less than the cost of cash transactions. The five different methods are compared for their hedging effectiveness in enhancing the ability of investors to reduce risk and enhance price discovery, which are the main functions of the futures markets.

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Published date: 2002

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Local EPrints ID: 464849
URI: http://eprints.soton.ac.uk/id/eprint/464849
PURE UUID: faf07ec1-cb29-4d8b-9060-47104fb5254a

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Date deposited: 05 Jul 2022 00:05
Last modified: 16 Mar 2024 19:47

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Author: Idries Omran Moftah Alghazali

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