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Stock Index Futures Hedging: Hedge Ratio Estimation, Duration Effects, Expiration Effects And Hedge Ratio Stability

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  • Phil Holmes

Abstract

This paper examines hedging effectiveness for the FTSE‐100 Stock Index futures contract from 1984 to 1992. It investigates the appropriate econometric technique to use in estimating minimum variance hedge ratios by undertaking estimations using OLS, an ECM and GARCH. Simple OLS outperforms more complex econometric techniques. Additionally, the paper examines the impact ofhedge duration and time to expiration on estimated hedge ratios and hedge ratio stability over time. It is shown that hedge ratios and hedging effectiveness increase with hedge duration, hedge ratios approach unity as expiration approaches and while hedge ratios vary over time they are stationary.

Suggested Citation

  • Phil Holmes, 1996. "Stock Index Futures Hedging: Hedge Ratio Estimation, Duration Effects, Expiration Effects And Hedge Ratio Stability," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 23(1), pages 63-77, January.
    • Handle: RePEc:bla:jbfnac:v:23:y:1996:i:1:p:63-77
    DOI: 10.1111/j.1468-5957.1996.tb00402.x
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    References listed on IDEAS

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    6. 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.
    7. Figlewski, Stephen, 1984. "Hedging Performance and Basis Risk in Stock Index Futures," Journal of Finance, American Finance Association, vol. 39(3), pages 657-669, July.
    8. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78, World Scientific Publishing Co. Pte. Ltd..
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