Hedging effectiveness in the index futures market

Copeland, Laurence; Zhu, Yanhui

Abstract

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.

• Publication Date: Nov 1, 2010
• Peer Reviewed: Not Peer Reviewed
• Pages: 97-117
• Book Title: Nonlinear Financial Econometrics: Forecasting Models, Computational and Bayesian Models
• ISBN: 9780230283657
• Keywords: index futures, garch, hedging
• Public URL: https://uwe-repository.worktribe.com/output/973793
• Publisher URL: http://www.palgrave.com/products/title.aspx?PID=484471