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Time-Varying Hedge Ratios: An Application to the Indian Stock Futures Market

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Author Info
Prasad Bhattacharaya () (Deakin University)
Harminder Singh () (Deakin University)
Gerard Gannon () (Deakin University)
Abstract

Using different unconditional and conditional versions of the bivariate BEKK-GARCH model of Engle and Kroner, we calculate time-varying hedge ratios for Indian stock futures market involving a cross-section of seven firms across a spectrum of industries. These models are solved not only with the usual square root exponent but also analysed with an unrestricted version where the exponent is set to one. Our results show time-varying hedge ratios with the exponent set to one improve over hedge ratios obtained from the square root exponent setup as well as over static hedge ratios calculated from the error correction types of models. Time-varying optimal hedge ratio calculation in this new framework makes perfect sense in terms of portfolio allocation decision involving individual stock futures.

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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2006-03aef.pdf
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Publisher Info
Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Accounting, Finance, Financial Planning and Insurance Series with number 2006_03.

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Length: 34 pages
Date of creation: 20 Aug 2006
Date of revision:
Handle: RePEc:dkn:acctwp:aef_2006_03

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Related research
Keywords: Unrestricted BEKK-GARCH; Stock Futures; Dynamic Hedging;

Find related papers by JEL classification:
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

References listed on IDEAS
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  1. Moschini, GianCarlo & Myers, Robert J., 2002. "Testing for constant hedge ratios in commodity markets: a multivariate GARCH approach," Journal of Empirical Finance, Elsevier, vol. 9(5), pages 589-603, December. [Downloadable!] (restricted)
    Other versions:
  2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April. [Downloadable!] (restricted)
  3. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun. [Downloadable!] (restricted)
  4. Anil K. Bera & Philip Garcia & Jae-Sun Roh, 1997. "Estimation of Time-Varying Hedge Ratios for Corn and Soybeans: BGARCH and Random Coefficient Approaches," Finance 9712007, EconWPA. [Downloadable!]
  5. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February. [Downloadable!]
    Other versions:
  6. Yeh, Sally C & Gannon, Gerard L, 2000. " Comparing Trading Performance of the Constant and Dynamic Hedge Models: A Note," Review of Quantitative Finance and Accounting, Springer, vol. 14(2), pages 155-60, March. [Downloadable!] (restricted)
  7. Park, Tae H & Switzer, Lorne N, 1995. "Time-Varying Distributions and the Optimal Hedge Ratios for Stock Index Futures," Applied Financial Economics, Taylor and Francis Journals, vol. 5(3), pages 131-37, June. [Downloadable!] (restricted)
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