STOCK INDEX FUTURES HEDGING: HEDGE RATIO ESTIMATION, DURATION EFFECTS, EXPIRATION EFFECTS AND HEDGE RATIO STABILITY

STOCK INDEX FUTURES HEDGING: HEDGE RATIO ESTIMATION, DURATION EFFECTS, EXPIRATION EFFECTS AND... This paper examines hedging effectiveness for the FTSE‐100 Stock Index futures contract from 1984 to 1992. It investigates the appropriate econometric technique to use in estimating minimum variance hedge ratios by undertaking estimations using OLS, an ECM and GARCH. Simple OLS outperforms more complex econometric techniques. Additionally, the paper examines the impact ofhedge duration and time to expiration on estimated hedge ratios and hedge ratio stability over time. It is shown that hedge ratios and hedging effectiveness increase with hedge duration, hedge ratios approach unity as expiration approaches and while hedge ratios vary over time they are stationary. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Business Finance & Accounting Wiley

STOCK INDEX FUTURES HEDGING: HEDGE RATIO ESTIMATION, DURATION EFFECTS, EXPIRATION EFFECTS AND HEDGE RATIO STABILITY

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Publisher
Wiley Subscription Services, Inc., A Wiley Company
Copyright
Copyright © 1996 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0306-686X
eISSN
1468-5957
D.O.I.
10.1111/j.1468-5957.1996.tb00402.x
Publisher site
See Article on Publisher Site

Abstract

This paper examines hedging effectiveness for the FTSE‐100 Stock Index futures contract from 1984 to 1992. It investigates the appropriate econometric technique to use in estimating minimum variance hedge ratios by undertaking estimations using OLS, an ECM and GARCH. Simple OLS outperforms more complex econometric techniques. Additionally, the paper examines the impact ofhedge duration and time to expiration on estimated hedge ratios and hedge ratio stability over time. It is shown that hedge ratios and hedging effectiveness increase with hedge duration, hedge ratios approach unity as expiration approaches and while hedge ratios vary over time they are stationary.

Journal

Journal of Business Finance & AccountingWiley

Published: Jan 1, 1996

References

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