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Ex Ante Hedging Effectiveness of UK Stock Index Futures Contracts: Evidence for the FTSE 100 and FTSE Mid 250 Contracts

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  • Darren Butterworth
  • Phil Holmes

Abstract

Ex ante hedging effectiveness of the FTSE 100 and FTSE Mid 250 index futures contracts is examined for a range of portfolios, consisting of stock market indexes and professionally managed portfolios (investment trust companies). Previous studies which focused on ex post hedging performance using spot portfolios that mirror market indexes are shown to overstate the risk reduction potential of index futures. Although ex ante hedge ratios are found to be characterised by intertemporal instability, ex ante hedging performance of direct hedges and cross hedges approaches that of the ex post benchmark when hedge ratios are estimated using a sufficient window size.

Suggested Citation

  • Darren Butterworth & Phil Holmes, 2000. "Ex Ante Hedging Effectiveness of UK Stock Index Futures Contracts: Evidence for the FTSE 100 and FTSE Mid 250 Contracts," European Financial Management, European Financial Management Association, vol. 6(4), pages 441-457, December.
    • Handle: RePEc:bla:eufman:v:6:y:2000:i:4:p:441-457
    DOI: 10.1111/1468-036X.00134
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    Cited by:

    1. Patrick McGlenchy & Paul Kofman, 2004. "Structurally Sound Dynamic Index Futures Hedging," Econometric Society 2004 Australasian Meetings 80, Econometric Society.
    2. 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.
    3. Edyta Marcinkiewicz, 2016. "Short Sale and Index Futures Mispricing: Evidence from the Warsaw Stock Exchange," Prague Economic Papers, Prague University of Economics and Business, vol. 2016(5), pages 547-559.
    4. 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.
    5. Maria CARACOTA DIMITRIU & Ioana – Diana PAUN, 2012. "Short Term Hedging Using Futures Contracts," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 15(2), pages 436-445, December.
    6. Darren Butterworth & Phil Holmes, 2005. "The Hedging Effectiveness of U.K. Stock Index Futures Contracts Using an Extended Mean Gini Approach: Evidence for the FTSE 100 and FTSE Mid250 Contracts," Multinational Finance Journal, Multinational Finance Journal, vol. 9(3-4), pages 131-160, September.

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