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Improving futures hedging performance using option information: Evidence from the S&P 500 index

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  • Bai, Yujuan
  • Pan, Zhiyuan
  • Liu, Li

Abstract

Option prices contain important information about risk preferences. This study proposes an option-based model to estimate the optimal dynamic hedging ratio. Using a sample of S&P 500 index, we find that the option-implied hedging ratio has the best performance both in-sample and out-of-sample due to its relative risk aversion. This finding will help risk managers reduce their hedging risk.

Suggested Citation

  • Bai, Yujuan & Pan, Zhiyuan & Liu, Li, 2019. "Improving futures hedging performance using option information: Evidence from the S&P 500 index," Finance Research Letters, Elsevier, vol. 28(C), pages 112-117.
    • Handle: RePEc:eee:finlet:v:28:y:2019:i:c:p:112-117
    DOI: 10.1016/j.frl.2018.04.014
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    References listed on IDEAS

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    Cited by:

    1. Michele Azzone & Roberto Baviera, 2020. "Synthetic forwards and cost of funding in the equity derivative market," Papers 2011.03795, arXiv.org, revised Jan 2022.
    2. Azzone, Michele & Baviera, Roberto, 2021. "Synthetic forwards and cost of funding in the equity derivative market," Finance Research Letters, Elsevier, vol. 41(C).
    3. Babu Jose & James Varghese, 2021. "Ideal Investment Protection in Optimistic Perceptions: Evidence From the Indian Equity Options Market," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(2), pages 327-340, April.

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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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