Hedging effectiveness in the index futures market

Copeland, L. and Zhu, Y. (2010) Hedging effectiveness in the index futures market. In: Gregoriou, G. N. and Pascalau, R., eds. (2010) Nonlinear Financial Econometrics: Forecasting Models, Computational and Bayesian Models. Palgrave-MacMillan, pp. 97-117. ISBN 9780230283657 Available from: http://eprints.uwe.ac.uk/13599

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This paper addresses the question of how far hedging effectiveness can be improved by the use of more sophisticated models of the relationship between futures and spot prices. Working with daily data from six major index futures markets, we show that, when the cost of carry is incorporated in to the model, the two series are cointegrated, as anticipated. Fitting an ECM with a GJR-GARCH model of the variance process, we derive the implied optimal hedge ratios and compare their out-of-sample hedging effectiveness with OLS-based hedges. The results suggest little or no improvement over OLS.

Item Type:Book Section
Uncontrolled Keywords:index futures, garch, hedging
Faculty/Department:Faculty of Business and Law > Department of Accounting, Economics and Finance
ID Code:13599
Deposited By: Dr Y. Zhu
Deposited On:19 Jan 2011 14:41
Last Modified:15 Nov 2016 23:12

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