Premium
Measuring Hedging Effectiveness of Index Futures Contracts: Do Dynamic Models Outperform Static Models? A Regime‐Switching Approach
Author(s) -
Salvador Enrique,
Aragó Vicent
Publication year - 2014
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21598
Subject(s) - futures contract , econometrics , volatility (finance) , autoregressive conditional heteroskedasticity , economics , stock index futures , index (typography) , nonlinear system , hedge , stock (firearms) , stock market index , financial economics , mathematics , computer science , stock market , physics , engineering , mechanical engineering , paleontology , ecology , horse , world wide web , biology , quantum mechanics
This study estimates linear and nonlinear GARCH models to find optimal hedge ratios with futures contracts for some of the main European stock indexes. By introducing nonlinearities through a regime‐switching model, we can obtain more efficient hedge ratios and superior hedging performance in both an in‐sample and an out‐sample analysis compared to the other methodologies (constant hedge ratios and linear GARCH). Moreover, nonlinear models also reflect the different patterns followed by the dynamic relationship between the volatility of spot and futures returns during low‐ and high‐volatility periods. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:374–398, 2014