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Hedging with Foreign-Listed Single Stock Futures

In: Advances In Quantitative Analysis Of Finance And Accounting New Series

Author

Listed:
  • Mao-wei Hung

    (College of Management, National Taiwan University, No. 1, Section 4, Roosevelt Road, Taipei, Taiwan)

  • Cheng-few Lee

    (Department of Finance, Rutgers University, 94 Rockafeller Road, Piscataway, NJ 08854, USA)

  • Leh-chyan So

    (College of Management, National Taiwan University, No. 1, Section 4, Roosevelt Road, Taipei, Taiwan)

Abstract

The objective of this paper is to estimate the hedge ratios of foreign-listed single stock futures (SSFs) and to compare the performance of risk reduction of different methods. The OLS method and a bivariate GJR-GARCH model are employed to estimate constant optimal hedge ratios and the dynamic hedging ratios, respectively. Data of the SSFs listed on the London International Financial Future and Options Exchange (LIFFE) are used in this research. We find that the data series have high estimated constant optimal hedge ratios and high constant correlation in the bivariate GJR-GARCH model, except for three SSFs with their underlying stocks traded in Italy. Our findings provide evidence that distance is a critical factor when explaining investor's trading behavior. Results also show that in general, of the three methods examined (i.e., naïve hedge, conventional OLS method and dynamic hedging) the dynamic hedging performs the best and that naïve hedge is the worst.

Suggested Citation

  • Mao-wei Hung & Cheng-few Lee & Leh-chyan So, 2005. "Hedging with Foreign-Listed Single Stock Futures," World Scientific Book Chapters, in: Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting New Series, chapter 8, pages 129-151, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812701213_0008
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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