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Hedge Ratio Stability and Hedging Effectiveness of Time‐Varying Hedge Ratios in Volatile Index Futures Markets: Evidence from the Asian Financial Crisis *
Author(s) -
Wang Janchung,
Hsu Hsinan
Publication year - 2010
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/j.2041-6156.2010.01026.x
Subject(s) - futures contract , econometrics , hedge , economics , index (typography) , volatility (finance) , heteroscedasticity , basis risk , error correction model , financial economics , cointegration , computer science , capital asset pricing model , ecology , world wide web , biology
Abstract Hedge ratio stability is especially important because hedgers are likely to use the estimate of historical hedge ratios to hedge future positions of their portfolios. One main purpose of the present study is to examine hedge ratio stability during the Asian financial crisis and post‐crisis, periods characterized by high price volatility, using the Nikkei 225, Hang Seng, and KOSPI 200 index futures contracts. Empirical results from the Hang Seng and the KOSPI 200 futures markets indicate that during the two periods of high price volatility, hedge ratios appeared to be unstable. Additionally, both in‐sample and out‐of‐sample evidences indicate that, for hedging effectiveness, the time‐varying hedge ratios clearly outperform the constant hedge ratios for the Hang Seng and the KOSPI 200 index futures, consistent with the findings of hedge ratio instability. The comparison results of different time‐varying hedge ratios support the conclusion that the bivariate error correction generalized autoregressive conditional heteroskedastic (1,1) model enhances hedging effectiveness compared to other time‐varying hedge ratios. Finally, this study examines the impact of hedge duration on hedging effectiveness and hedge ratios. The empirical results indicate that hedging effectiveness improves with increasing hedge duration.