Hedging effectiveness for international index futures markets

Alexandros Koulis 1 , George Kaimakamis 2  and Christina Beneki 1
  • 1 Department of Business Administration, Technological Institute of Ionian Islands,, Atena, Greece
  • 2 Hellenic Army Academy,, Atena, Greece

Abstract

This paper investigates the hedging effectiveness of the International Index Futures Markets using daily settlement prices for the period 4 January 2010 to 31 December 2015. Standard OLS regressions, Error Correction Model (ECM), as well as Autoregressive Distributed Lag (ARDL) cointegration model are employed to estimate corresponding hedge ratios that can be employed in risk management. The analyzed sample consists of daily closing market rates of the stock market indexes of the USA and the European futures contracts. The findings indicate that the time varying hedge ratios, if estimated through the ARDL model, are more efficient than the fixed hedge ratios in terms of minimizing the risk. Additionally, there is evidence that the comparative advantage of advanced econometric approaches compared to conventional models is enhanced further for capital markets within peripheral EU countries

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • Baillie, R. T., & Myers, R. J. (1991). Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge. Journal of Applied Econometrics, 6(2), 109-124. https://doi.org/10.1002/jae.3950060202

  • Cecchetti, S. & Cumby, R. (1988). Estimation of the Optimal Futures Hedge. The Review of Economics and Statistics, 70(4), 623-630.

  • Chen, S.S., Lee, C.F., & Shrestha, K. (2001). On a Mean-Generalized Semivariance Approach to Determining the Hedge Ratio. Journal of Futures Markets, 21, 581-598. https://doi.org/10.1002/fut.1604

  • Chou, W., Denis, K., & Lee, C. (1996). Hedging with the Nikkei Index Futures: The Convential Model versus the Error Correction Model. The Quarterly Review of Economics and Finance, 36(4), 495-505. https://doi.org/10.1016/S1062-9769(96)90048-4

  • Dickey, D.A., & Fuller, W.A. (1981). Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica, 49, 1057-1072. https://doi.org/10.2307/1912517

  • Ederington, L.H. (1979). The Hedging Performance of the New Futures Markets. The Journal of Finance, 34(1), 157-170. https://doi.org/10.1111/j.1540-6261.1979.tb02077.x

  • Ghosh, A. (1993). Cointegration and Error Correction Models: Intertemporal Causality between Index and Futures Prices. Journal of Futures Markets, 13, 193-198.

  • Herbst, A. F., Kare, D. D., & Caples, S. C. (1989). Hedging Effectiveness and Minimum Risk Hedge Ratios in the Presence of Autocorrelation: Foreign Currency Futures. Journal of Futures Markets, 9(3), 185-197. https://doi.org/10.1002/fut.3990090302

  • Johnson, L. L. (1960). The Theory of Hedging and Speculation in Commodity Futures. Review of Economic Studies, 27, 139-151.

  • Juhl, T., Kawaller, I. G., & Koch, P. D. (2012). The Effect of the Hedge Horizon on Optimal Hedge Size and Effectiveness when Prices are Cointegrated. Journal of Futures Markets, 32(9), 837-876. https://doi.org/10.1002/fut.20544

  • Lee, C.F., Lin, F.L., Tu, H.C., Chen, M.L. (2009). Alternative Methods for Estimating Hedge Ratio: Review, Integration and Empirical Evidence. Working paper, Rutgers University.

  • Lee, C. F., Wang, K., & Chen, Y. L. (2009). Hedging and Optimal Hedge Ratios for International Index Futures Markets. Review of Pacific Basin Financial Markets and Policies, 12(04), 593-610. https://doi.org/10.1142/S0219091509001769

  • Lien, D., & Luo, X. (1993). Estimating Multiperiod Hedge Ratios in Cointegrated Markets. Journal of Futures Markets, 13(8), 909-920. https://doi.org/10.1002/fut.3990130808

  • Lien, D., & Luo, X. (1994). Multiperiod Hedging in the Presence Of Conditional Heteroskedasticity. Journal of Futures Markets, 14(8), 927-955. https://doi.org/10.1002/fut.3990140806

  • Lien, D., & Tse, Y.K. (1998). Hedging Time-Varying Downside Risk. Journal of Futures Markets, 18, 705-722. https://doi.org/10.1002/(SICI)1096-9934(199809)18:6<705::AID-FUT4>3.0.CO;2-R

  • Lien, D., & Tse, Y.K. (2000). Hedging Downside Risk With Futures Contracts. Applied Financial Economics, 10, 163-170. https://doi.org/10.1080/096031000331798

  • Norden, L. (2006). Does an Index Futures Split Enhance Trading Activity and Hedging Effectiveness of the Futures Contract? Journal of Futures Markets, 26, 1169-1194. https://doi.org/10.1002/fut.20237

  • Park, H. Y., & Bera, A. K. (1987). Interest‐Rate Volatility, Basis Risk and Heteroscedasticity in Hedging Mortgages. Real Estate Economics, 15(2), 79-97. https://doi.org/10.1111/1540-6229.00420

  • Pennings, J.M.E., & Meulenberg, M.T.G. (1997). Hedging Efficiency: a Futures Exchange Management Approach. Journal of Futures Markets, 17, 599-615. https://doi.org/10.1002/(SICI)1096-9934(199708)17:5<599::AID-FUT5>3.0.CO;2-A

  • Pesaran, M. H. (1997). The Role of Economic Theory in Modelling the Long Run. Economic Journal, 107, 178-191.

  • Phillips, P., & Perron, P. (1988). Testing Unit Roots in Time Series Regression. Biometrika, 75, 335-346. https://doi.org/10.2307/2336182

  • Sah, A. N., & Pandey, K. K. (2011). Hedging Effectiveness of Index Futures Contract: The Case of S&P CNX Nifty. Global Journal of Finance and Management, 3(1), 77-89.

  • Shalit, H. (1995). Mean‐Gini hedging in futures markets. Journal of Futures Markets, 15(6), 617-635. https://doi.org/10.1002/fut.3990150603

  • Switzer, L.N. & El-Khoury, M. (2007). Extreme Volatility, Speculative Efficiency, and the Hedging Effectiveness of the Oil Futures Markets. Journal of Futures Markets, 27(1), 61-84. https://doi.org/10.1002/fut.20235

  • Wang, J., & Hsu, H. (2010). Hedge Ratio Stability and Hedging Effectiveness of Time‐Varying Hedge Ratios in Volatile Index Futures Markets: Evidence from the Asian Financial Crisis. Asia‐Pacific Journal of Financial Studies, 39(5), 659-686. https://doi.org/10.1111/j.2041-6156.2010.01026.x

  • Zhou, J. (2016). Hedging Performance of REIT Index Futures: a Comparison of Alternative Hedge Ratio Estimation Methods. Economic Modelling, 52(PB), 690-698. https://doi.org/10.1016/j.econmod.2015.10.009.

OPEN ACCESS

Journal + Issues

Search