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HEDGING WITH INTERNATIONAL STOCK INDEX FUTURES: AN INTERTEMPORAL ERROR CORRECTION MODEL
Author(s) -
Ghosh Asim,
Clayton Ronnie
Publication year - 1996
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1996.tb00226.x
Subject(s) - stock index futures , cointegration , futures contract , econometrics , economics , error correction model , index (typography) , hedge , stock (firearms) , stock market index , financial economics , computer science , stock market , mechanical engineering , paleontology , ecology , horse , world wide web , engineering , biology
In this paper we extend the traditional price change hedge ratio estimation method by applying the theory of cointegration to hedging with stock index futures contracts for France (CAC 40), the United Kingdom (FTSE 100), Germany (DAX), and Japan (NIKKEI). Previous studies ignore the last period's equilibrium error and short‐run deviations. The findings of this study indicate that the hedge ratios obtained from the error correction method are superior to those obtained from the traditional method as evidenced by the likelihood ratio test and out‐of‐sample forecasts. Using the procedures developed in this paper, hedgers can control the risk of their portfolios more effectively at a lower cost.