Premium
STOCK INDEX FUTURES HEDGING: HEDGE RATIO ESTIMATION, DURATION EFFECTS, EXPIRATION EFFECTS AND HEDGE RATIO STABILITY
Author(s) -
Holmes Phil
Publication year - 1996
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1996.tb00402.x
Subject(s) - stock index futures , econometrics , futures contract , hedge , expiration , economics , index (typography) , stock (firearms) , financial economics , actuarial science , stock market index , stock market , computer science , medicine , mechanical engineering , paleontology , ecology , horse , world wide web , respiratory system , biology , engineering
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.