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International Hedge Ratios for Index Futures Market: A Simultaneous Equations Approach

Listed author(s):
  • Cheng-Few Lee

    (Department of Finance, Rutgers University, USA)

  • Fu-Lai Lin


    (Department of Finance, Da-Yeh University, 168 University Rd, Da-Tsuen, Changhua, Taiwan 51591, R.O.C.)

  • Mei-Ling Chen

    (Department of International Business Management, Da-Yeh University, Taiwan)

Registered author(s):

    The main purpose of this paper is to investigate hedge ratios in terms of the international index futures markets. Instead of looking at hedging in a single market, we construct a simultaneous equations system to study the index hedging in the light of the cross-country linkage and interaction. The three-stage least squares (3SLS) estimating procedure is then applied to CAC40 and FTSE100 indices over the period 1990–2008. The empirical results indicate that the cross-country hedging strategy in both markets is feasible and the investors can bring down the holding position in own futures market. Moreover, the hedging effectiveness of cross-country hedging strategy performs better than the traditional single market hedging strategy in terms of the percentage reduction in variance.

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    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

    Volume (Year): 13 (2010)
    Issue (Month): 02 ()
    Pages: 203-213

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    Handle: RePEc:wsi:rpbfmp:v:13:y:2010:i:02:p:203-213
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