IDEAS home Printed from https://ideas.repec.org/a/taf/applec/v48y2016i42p3999-4018.html
   My bibliography  Save this article

The effectiveness of index futures hedging in emerging markets during the crisis period of 2008-2010: Evidence from South Africa

Author

Listed:
  • Lumengo Bonga-Bonga
  • Ekerete Umoetok

Abstract

This article provides an assessment of the comparative effectiveness of four econometric methods in estimating the optimal hedge ratio in an emerging equity market, particularly the South African equity and futures markets. The article bases the effectiveness of hedging on volatility reduction and minimization of the coefficient of variation of hedged returns as well as risk-aversion-based utility maximization. The empirical analysis shows that the vector error-correction method and multivariate generalized autoregressive conditional heteroscedasticity methods are most effective over relatively long horizon, weekly and monthly hedging periods.

Suggested Citation

  • Lumengo Bonga-Bonga & Ekerete Umoetok, 2016. "The effectiveness of index futures hedging in emerging markets during the crisis period of 2008-2010: Evidence from South Africa," Applied Economics, Taylor & Francis Journals, vol. 48(42), pages 3999-4018, September.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:42:p:3999-4018
    DOI: 10.1080/00036846.2016.1150948
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/00036846.2016.1150948
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/00036846.2016.1150948?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Choudhry, Taufiq, 2003. "Short-run deviations and optimal hedge ratio: evidence from stock futures," Journal of Multinational Financial Management, Elsevier, vol. 13(2), pages 171-192, April.
    2. Mahmoud Wahab, 1995. "Conditional dynamics and optimal spreading in the precious metals futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(2), pages 131-166, April.
    3. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    4. Suk-Joong Kim & Eliza Wu, 2018. "Sovereign Credit Ratings, Capital Flows and Financial Sector Development in Emerging Markets," World Scientific Book Chapters, in: Information Spillovers and Market Integration in International Finance Empirical Analyses, chapter 13, pages 431-466, World Scientific Publishing Co. Pte. Ltd..
    5. Laws, Jason & Thompson, John, 2005. "Hedging effectiveness of stock index futures," European Journal of Operational Research, Elsevier, vol. 163(1), pages 177-191, May.
    6. Lumengo Bonga-Bonga & Jamela Hoveni, 2013. "Volatility Spillovers between the Equity Market and Foreign Exchange Market in South Africa in the 1995-2010 Period," South African Journal of Economics, Economic Society of South Africa, vol. 81(2), pages 260-274, June.
    7. Edison, Hali J. & Warnock, Francis E., 2008. "Cross-border listings, capital controls, and equity flows to emerging markets," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 1013-1027, October.
    8. Tamir Agmon & Avi Messica, 2009. "Financial Foreign Direct Investment: The Role of Private Equity Investments in the Globalization of Firms from Emerging Markets," Management International Review, Springer, vol. 49(1), pages 11-26, February.
    9. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    10. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    11. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    12. Geert Bekaert & Campbell R. Harvey & Angela Ng, 2005. "Market Integration and Contagion," The Journal of Business, University of Chicago Press, vol. 78(1), pages 39-70, January.
    13. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    14. Stavros Degiannakis & Christos Floros, 2010. "Hedge Ratios in South African Stock Index Futures," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 9(3), pages 285-304, December.
    15. Stephen Figlewski, 1985. "Hedging with stock index futures: Theory and application in a new market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 5(2), pages 183-199, June.
    16. Lien, Donald & Shrestha, Keshab, 2008. "Hedging effectiveness comparisons: A note," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 391-396.
    17. Franckle, Charles T, 1980. "The Hedging Performance of the New Futures Markets: Comment," Journal of Finance, American Finance Association, vol. 35(5), pages 1273-1279, December.
    18. Mary Lindahl, 1992. "Minimum variance hedge ratios for stock index futures: Duration and expiration effects," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 12(1), pages 33-53, February.
    19. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    20. Alain Kabundi & Elsabé Loots, 2009. "Patterns of co-movement between a developed and emerging market economy: The case of South Africa and Germany," Working Papers 159, Economic Research Southern Africa.
    21. Donald Lien, 2005. "A note on the superiority of the OLS hedge ratio," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(11), pages 1121-1126, November.
    22. Robert J. Myers, 1991. "Estimating time‐varying optimal hedge ratios on futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(1), pages 39-53, February.
    23. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    24. Hearn, Bruce & Piesse, Jenifer & Strange, Roger, 2010. "Market liquidity and stock size premia in emerging financial markets: The implications for foreign investment," International Business Review, Elsevier, vol. 19(5), pages 489-501, October.
    25. A. F. Herbst & D. D. Kare & S. C. Caples, 1989. "Hedging effectiveness and minimum risk hedge ratios in the presence of autocorrelation: Foreign currency futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 9(3), pages 185-197, June.
    26. Leland L. Johnson, 1960. "The Theory of Hedging and Speculation in Commodity Futures," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 27(3), pages 139-151.
    27. Wenling Yang & David E. Allen, 2005. "Multivariate GARCH hedge ratios and hedging effectiveness in Australian futures markets," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(2), pages 301-321, July.
    28. DeJong, David N. & Whiteman, Charles H., 1991. "Reconsidering 'trends and random walks in macroeconomic time series'," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 221-254, October.
    29. Robert J. Myers & Stanley R. Thompson, 1989. "Generalized Optimal Hedge Ratio Estimation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(4), pages 858-868.
    30. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    31. Donald Lien & Mei Zhang, 2008. "A Survey of Emerging Derivatives Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(2), pages 39-69, March.
    32. Grammatikos, Theoharry & Vermeulen, Robert, 2012. "Transmission of the financial and sovereign debt crises to the EMU: Stock prices, CDS spreads and exchange rates," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 517-533.
    33. Tae H. Park & Lorne N. Switzer, 1995. "Bivariate GARCH estimation of the optimal hedge ratios for stock index futures: A note," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(1), pages 61-67, February.
    34. Onur Olgun & I. Hakan Yetkiner, 2011. "Determination of Optimal Hedging Strategy for Index Futures: Evidence from Turkey," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(6), pages 68-79, November.
    35. Timotheos Angelidis, 2010. "Idiosyncratic Risk in Emerging Markets," The Financial Review, Eastern Finance Association, vol. 45(4), pages 1053-1078, November.
    36. Schwert, G. William, 1987. "Effects of model specification on tests for unit roots in macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 73-103, July.
    37. Bekaert, Geert & Harvey, Campbell R., 2002. "Research in emerging markets finance: looking to the future," Emerging Markets Review, Elsevier, vol. 3(4), pages 429-448, December.
    38. Donald Lien & Yiu Kuen Tse, 1998. "Hedging time‐varying downside risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(6), pages 705-722, September.
    39. Asim Ghosh, 1993. "Hedging with stock index futures: Estimation and forecasting with error correction model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(7), pages 743-752, October.
    40. Gagnon, Louis & Lypny, Gregory J. & McCurdy, Thomas H., 1998. "Hedging foreign currency portfolios," Journal of Empirical Finance, Elsevier, vol. 5(3), pages 197-220, September.
    41. Saumitra Bhaduri & S. Raja Sethu Durai, 2008. "Optimal hedge ratio and hedging effectiveness of stock index futures: evidence from India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 1(1), pages 121-134.
    42. Bruce Hearn & Jenifer Piesse & Roger Strange, 2010. "Market liquidity and stock size premia in emerging financial markets," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 3(1), pages 75-101.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Morema, Kgotso & Bonga-Bonga, Lumengo, 2020. "The impact of oil and gold price fluctuations on the South African equity market: Volatility spillovers and financial policy implications," Resources Policy, Elsevier, vol. 68(C).
    2. Samia Nasreen & Aviral Kumar Tiwari & Seong-Min Yoon, 2021. "Dynamic Connectedness and Portfolio Diversification during the Coronavirus Disease 2019 Pandemic: Evidence from the Cryptocurrency Market," Sustainability, MDPI, vol. 13(14), pages 1-14, July.
    3. Lumengo Bonga-Bonga & Mathias mandla Manguzvane, 2020. "Assessing the extent of contagion of sovereign credit risk among BRICS countries," Economics Bulletin, AccessEcon, vol. 40(2), pages 1017-1032.
    4. Babu Jose & Nithin Jose, 2023. "Is Cross-Hedging Effective for Mitigating Equity Investment Risks in the Indian Banking Sector?," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(1), pages 189-210, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. An-Sing Chen & Yan-Zhen Liu, 2008. "Enhancing hedging performance with the spanning polynomial projection," Quantitative Finance, Taylor & Francis Journals, vol. 8(6), pages 605-617.
    2. Shashi Gupta & Himanshu Choudhary & D.R. Agarwal, 2017. "Hedging Efficiency of Indian Commodity Futures," Paradigm, , vol. 21(1), pages 1-20, June.
    3. Gurmeet Singh, 2017. "Estimating Optimal Hedge Ratio and Hedging Effectiveness in the NSE Index Futures," Jindal Journal of Business Research, , vol. 6(2), pages 108-131, December.
    4. Alexandridis, George & Sahoo, Satya & Song, Dong-Wook & Visvikis, Ilias, 2018. "Shipping risk management practice revisited: A new portfolio approach," Transportation Research Part A: Policy and Practice, Elsevier, vol. 110(C), pages 274-290.
    5. Olson, Eric & Vivian, Andrew & Wohar, Mark E., 2019. "What is a better cross-hedge for energy: Equities or other commodities?," Global Finance Journal, Elsevier, vol. 42(C).
    6. Martínez, Beatriz & Torró, Hipòlit, 2015. "European natural gas seasonal effects on futures hedging," Energy Economics, Elsevier, vol. 50(C), pages 154-168.
    7. Bessler, Wolfgang & Leonhardt, Alexander & Wolff, Dominik, 2016. "Analyzing hedging strategies for fixed income portfolios: A Bayesian approach for model selection," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 239-256.
    8. Olson, Eric & Vivian, Andrew & Wohar, Mark E., 2017. "Do commodities make effective hedges for equity investors?," Research in International Business and Finance, Elsevier, vol. 42(C), pages 1274-1288.
    9. Yudong Wang & Chongfeng Wu & Li Yang, 2015. "Hedging with Futures: Does Anything Beat the Naïve Hedging Strategy?," Management Science, INFORMS, vol. 61(12), pages 2870-2889, December.
    10. Dar-Hsin Chen & Leo Bin & Chun-Yi Tseng, 2014. "Hedging Effectiveness of Applying Constant and Time-Varying Hedge Ratios: Evidence from Taiwan Stock Index Spot and Futures," Journal of Risk & Control, Risk Market Journals, vol. 1(1), pages 31-49.
    11. Mohd Aminul Islam, 2017. "An Empirical Evaluation of Hedging Effectiveness of Crude Palm Oil Futures Market in Malaysia," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(11), pages 303-314, 11-2017.
    12. Michael S. Haigh & Matthew T. Holt, 2002. "Combining time-varying and dynamic multi-period optimal hedging models," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 29(4), pages 471-500, December.
    13. Committee, Nobel Prize, 2003. "Time-series Econometrics: Cointegration and Autoregressive Conditional Heteroskedasticity," Nobel Prize in Economics documents 2003-1, Nobel Prize Committee.
    14. Jahangir Sultan & Mohammad Hasan, 2008. "The effectiveness of dynamic hedging: evidence from selected European stock index futures," The European Journal of Finance, Taylor & Francis Journals, vol. 14(6), pages 469-488.
    15. Pandey, Ajay, 2008. "Hedging Effectiveness of Constant and Time Varying Hedge Ratio in Indian Stock and Commodity Futures Markets," IIMA Working Papers WP2008-06-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    16. Babu Jose & Nithin Jose, 2023. "Is Cross-Hedging Effective for Mitigating Equity Investment Risks in the Indian Banking Sector?," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(1), pages 189-210, March.
    17. Pablo Urtubia & Alfonso Novales & Andrés Mora-Valencia, 2021. "Cross-Hedging Portfolios in Emerging Stock Markets: Evidence for the LATIBEX Index," Mathematics, MDPI, vol. 9(21), pages 1-19, October.
    18. Ghoddusi, Hamed & Emamzadehfard, Sahar, 2017. "Optimal hedging in the US natural gas market: The effect of maturity and cointegration," Energy Economics, Elsevier, vol. 63(C), pages 92-105.
    19. Morema, Kgotso & Bonga-Bonga, Lumengo, 2018. "The impact of oil and gold price fluctuations on the South African equity market: volatility spillovers and implications for portfolio management," MPRA Paper 87637, University Library of Munich, Germany.
    20. ÇELİK, İsmail, 2021. "Optimal Hedge Ratio In Turkish Stock Index Futures Market: A Deco-Fiaparch Approach," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 25(4), pages 17-33, December.

    More about this item

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:48:y:2016:i:42:p:3999-4018. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEC20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.