The Mib30 index and futures relationship: econometric analysis and implications for hedging
AbstractThe interactions between the Mib30 stock market index and its future contract are examined. Using daily data for the 1994-2002 period, it is found that the cost-of-carry model holds as an equilibrium relationship between spot and futures prices. Deviations from equilibrium are corrected by movements in the spot market, but cross-market dynamics are also important in the short run. We model the time-varying volatility of daily returns' as an autoregressive conditional heteroscedastic process; this model used to estimate minimum-variance hedge ratios. In- and out-of-sample comparisons with static hedging show that, by carefully choosing the ARCH specification, a significant improvement in variance reduction can be achieved.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 14 (2004)
Issue (Month): 18 ()
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Web page: http://www.tandfonline.com/RAFE20
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