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Cross Hedging with Single Stock Futures

Author

Listed:
  • Chris Brooks

    (ICMA Centre, University of Reading)

  • Ryan J. Davies

    (ICMA Centre, University of Reading)

  • Sang Soo Kim

    (ICMA Centre, University of Reading)

Abstract

This study evaluates the efficiency of cross hedging with the new single stock futures (SSF) contracts recently introduced in the United States. We use matched sample estimation techniques to select SSF contracts that will reduce the basis risk of crossing hedging and will yield the most efficient hedging portfolio. Employing multivariate matching techniques with cross-sectional matching characteristics, we can improve hedging efficiency while at the same time overcoming the contingency of the correlation between spot and futures prices on the sample period and length. Overall, we find that the best hedging performance is achieved through a portfolio that is hedged with market index futures and a SSF matched by both historical return correlation and cross-sectional matching characteristics. We also find it preferable to retain the chosen SSF contracts for the whole out-of-sample period but to re-estimate the optimal hedge ratio for each rolling window.

Suggested Citation

  • Chris Brooks & Ryan J. Davies & Sang Soo Kim, 2005. "Cross Hedging with Single Stock Futures," ICMA Centre Discussion Papers in Finance icma-dp2004-15, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2004-15
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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2004-16v2.pdf
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    References listed on IDEAS

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    Cited by:

    1. Bessler, Wolfgang & Wolff, Dominik, 2014. "Hedging European government bond portfolios during the recent sovereign debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 379-399.
    2. Zura Kakushadze & Juan Andrés Serur, 2018. "151 Trading Strategies," Springer Books, Springer, number 978-3-030-02792-6, June.
    3. Noriza Binti Mohd Saad & Noraini Binti Ismail & Nor Edi Azhar Binti Mohamad & Normaisarah Binti Abdul Manaf, 2012. "Performance of Crude Palm Oil and Crude Palm Kernel Oil Futures in Malaysian Derivatives Market," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(4), pages 136-143, October.
    4. Lee, Hsiang-Tai & Tsang, Wei-Lun, 2011. "Cross hedging single stock with American Depositary Receipt and stock index futures," Finance Research Letters, Elsevier, vol. 8(3), pages 146-157, September.

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