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Hedging Effectiveness in the Index Futures Market

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  • Copeland, Laurence

    ()
    (Cardiff Business School)

  • Zhu, Yanhui

    ()
    (Cardiff Business School)

Abstract

This paper addresses the question of how far hedging effectiveness can be improved by the use of more sophisticated models of the relationship between futures and spot prices. Working with daily data from six major index futures markets, we show that, when the cost of carry is incorporated in to the model, the two series are cointegrated, as anticipated. Fitting an ECM with a GJR-GARCH model of the variance process, we derive the implied optimal hedge ratios and compare their out-of-sample hedging effectiveness with OLS-based hedges. The results suggest little or no improvement over OLS.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2006/10.

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Length: 19 pages
Date of creation: Feb 2006
Date of revision:
Publication status: Forthcoming in Gregoriou, G.N. and R. Pascalau (eds.) Financial Econometrics Modelling: Derivatives Pricing and Hedge Funds and Term Structure Models, Palgrave-MacMillan, 2011.
Handle: RePEc:cdf:wpaper:2006/10

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Cited by:
  1. Lien, Donald, 2009. "A note on the hedging effectiveness of GARCH models," International Review of Economics & Finance, Elsevier, Elsevier, vol. 18(1), pages 110-112, January.
  2. Zanotti, Giovanna & Gabbi, Giampaolo & Geranio, Manuela, 2010. "Hedging with futures: Efficacy of GARCH correlation models to European electricity markets," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 20(2), pages 135-148, April.
  3. John Hua Fan & Eduardo Roca & Alexandr Akimov, 2010. "Hedging With Futures Contract: Estimation and Performance Evaluation of Optimal Hedge Ratios in the European Union Emissions Trading Scheme," Discussion Papers in Finance finance:201009, Griffith University, Department of Accounting, Finance and Economics.

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