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Hedging effectiveness in the index futures market

Copeland, Laurence; Zhu, Yanhui

Authors

Laurence Copeland

Yanhui Zhu Yanhui.Zhu@uwe.ac.uk
Senior Lecturer in Economics



Contributors

Greg N. Gregoriou
Editor

Razvan Pascalau
Editor

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.

Citation

Copeland, L., & Zhu, Y. (2010). Hedging effectiveness in the index futures market. In G. N. Gregoriou, & R. Pascalau (Eds.), Nonlinear Financial Econometrics: Forecasting Models, Computational and Bayesian Models, 97-117. Palgrave-MacMillan

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Peer Reviewed Not Peer Reviewed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
Publisher URL http://www.palgrave.com/products/title.aspx?PID=484471