The Spider in the Hedge
This paper provides an empirical study of the effectiveness of hedging the spider, a passive exchange traded fund (ETF) that replicates the S&P500 index. The spider is by far the largest ETF in the world: trading on the spider has grown so much during the past few years that it is now amongst the few most traded securities in the AMEX. The large net daily creation and redemption orders of recent years pose a problem to the market makers in the spider, as the orders may be too large to execute in the cash market. They face a decision about whether to hedge spider positions on their own book; and if so, how should they hedge? We have employed several sophisticated minimum variance estimates for the future hedge ratio, including OLS regression, an ECM to account for maturity effects and the cointegration of the spot and the future prices and, to the ECM residuals we apply EWMA and number of bivariate GARCH models to account for time-variation in the hedge ratio. We have applied these models to daily data for a 1-day rebalancing frequency and to weekly data for a 5-day re-balancing frequency, using data since the spider’s inception until the end of 2004. Marginal differences in the ‘optimal’ hedge ratios are apparent, but they are simply too small to have any significant effect on the hedged portfolio volatility. In out-of-sample testing we find that the naïve hedge where an equal and opposite position is taken in the future performs as well as the more technically sophisticated models, at both the daily and the weekly re-balancing frequency. Finally, we have considered the differences between hedging the spot index and hedging the spider. The efficiency of hedging the spider is superior to that of the index and the spider hedged portfolios have significantly lower volatility than the spot index hedged portfolios.
|Date of creation:||Apr 2005|
|Publication status:||Published in Review of Futures Markets 2005, 11:1, 89-113|
|Contact details of provider:|| Postal: PO Box 218, Whiteknights, Reading, Berks, RG6 6AA|
Phone: +44 (0) 118 378 8226
Fax: +44 (0) 118 975 0236
Web page: http://www.henley.reading.ac.uk/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lucy F. Ackert & Yisong S. Tian, 1999.
"Efficiency in index options markets and trading in stock baskets,"
FRB Atlanta Working Paper
99-5, Federal Reserve Bank of Atlanta.
- Ackert, Lucy F. & Tian, Yisong S., 2001. "Efficiency in index options markets and trading in stock baskets," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1607-1634, September.
- Chris Brooks & Olan T. Henry & Gita Persand, 2002. "The Effect of Asymmetries on Optimal Hedge Ratios," The Journal of Business, University of Chicago Press, vol. 75(2), pages 333-352, April.
- Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988.
"Estimation of the Optimal Futures Hedge,"
The Review of Economics and Statistics,
MIT Press, vol. 70(4), pages 623-630, November.
- Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
- Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-124, April-Jun.
- Lucy F. Ackert & Yisong S. Tian, 2000. "Arbitrage and Valuation in the Market forStandard and Poor's Depository Receipts," Financial Management, Financial Management Association, vol. 29(3), Fall.
When requesting a correction, please mention this item's handle: RePEc:rdg:icmadp:icma-dp2005-05. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie Pearson)
If references are entirely missing, you can add them using this form.