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Hedging Effectiveness (hedging + effectiveness)
Selected AbstractsEx Ante Hedging Effectiveness of UK Stock Index Futures Contracts: Evidence for the FTSE 100 and FTSE Mid 250 ContractsEUROPEAN FINANCIAL MANAGEMENT, Issue 4 2000Darren Butterworth Ex ante hedging effectiveness of the FTSE 100 and FTSE Mid 250 index futures contracts is examined for a range of portfolios, consisting of stock market indexes and professionally managed portfolios (investment trust companies). Previous studies which focused on ex post hedging performance using spot portfolios that mirror market indexes are shown to overstate the risk reduction potential of index futures. Although ex ante hedge ratios are found to be characterised by intertemporal instability, ex ante hedging performance of direct hedges and cross hedges approaches that of the ex post benchmark when hedge ratios are estimated using a sufficient window size. [source] Hedge Ratio Stability and Hedging Effectiveness of Time-Varying Hedge Ratios in Volatile Index Futures Markets: Evidence from the Asian Financial Crisis,ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, Issue 5 2010Janchung Wang C10; G13; G15 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. [source] Ex Ante Hedging Effectiveness of UK Stock Index Futures Contracts: Evidence for the FTSE 100 and FTSE Mid 250 ContractsEUROPEAN FINANCIAL MANAGEMENT, Issue 4 2000Darren Butterworth Ex ante hedging effectiveness of the FTSE 100 and FTSE Mid 250 index futures contracts is examined for a range of portfolios, consisting of stock market indexes and professionally managed portfolios (investment trust companies). Previous studies which focused on ex post hedging performance using spot portfolios that mirror market indexes are shown to overstate the risk reduction potential of index futures. Although ex ante hedge ratios are found to be characterised by intertemporal instability, ex ante hedging performance of direct hedges and cross hedges approaches that of the ex post benchmark when hedge ratios are estimated using a sufficient window size. [source] Determination of stock closing prices and hedging performance with stock indices futuresACCOUNTING & FINANCE, Issue 4 2009Hsiu-Chuan Lee G14; G15; G18 Abstract This paper examines the impact of the determination of stock closing prices on futures price efficiency and hedging effectiveness with stock indices futures. The empirical results indicate that the increase in the length of the batching period of the stock closing call improves price efficiency in the futures closing prices and then enhances hedging performance in terms of the hedging risks. Additionally, from a utility-maximization point of view, hedging performance does not improve after the introduction of the 5 min stock closing call, which can be explained by an improvement in price efficiency at the futures market close. [source] The incremental value of a futures hedge using realized volatilityTHE JOURNAL OF FUTURES MARKETS, Issue 9 2010Yu-Sheng Lai A number of prior studies have developed a variety of multivariate volatility models to describe the joint distribution of spot and futures, and have applied the results to form the optimal futures hedge. In this study, the authors propose a new class of multivariate volatility models encompassing realized volatility (RV) estimates to estimate the risk-minimizing hedge ratio, and compare the hedging performance of the proposed models with those generated by return-based models. In an out-of-sample context with a daily rebalancing approach, based on an extensive set of statistical and economic performance measures, the empirical results show that improvement can be substantial when switching from daily to intraday. This essentially comes from the advantage that the intraday-based RV potentially can provide more accurate daily covariance matrix estimates than RV utilizing daily prices. Finally, this study also analyzes the effect of hedge horizon on hedge ratio and hedging effectiveness for both the in-sample and the out-of-sample data. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:874,896, 2010 [source] Estimation and hedging effectiveness of time-varying hedge ratio: Flexible bivariate garch approachesTHE JOURNAL OF FUTURES MARKETS, Issue 1 2010Sung Yong Park Bollerslev's (1990, Review of Economics and Statistics, 52, 5,59) constant conditional correlation and Engle's (2002, Journal of Business & Economic Statistics, 20, 339,350) dynamic conditional correlation (DCC) bivariate generalized autoregressive conditional heteroskedasticity (BGARCH) models are usually used to estimate time-varying hedge ratios. In this study, we extend the above model to more flexible ones to analyze the behavior of the optimal conditional hedge ratio based on two (BGARCH) models: (i) adopting more flexible bivariate density functions such as a bivariate skewed- t density function; (ii) considering asymmetric individual conditional variance equations; and (iii) incorporating asymmetry in the conditional correlation equation for the DCC-based model. Hedging performance in terms of variance reduction and also value at risk and expected shortfall of the hedged portfolio are also conducted. Using daily data of the spot and futures returns of corn and soybeans we find asymmetric and flexible density specifications help increase the goodness-of-fit of the estimated models, but do not guarantee higher hedging performance. We also find that there is an inverse relationship between the variance of hedge ratios and hedging effectiveness. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:71,99, 2010 [source] Liquidity and hedging effectiveness under futures mispricing: International evidenceTHE JOURNAL OF FUTURES MARKETS, Issue 11 2009A. Andani We analyze the hedging effectiveness of positions that replicate stock indexes using corresponding futures contracts through the application of a dynamic, stochastic hedging strategy proposed by Lafuente, J. A. and Novales, A. (2003). Conclusive gains do not emerge in any of the markets analyzed over the period considered, relative to the use of a constant unit hedge ratio. These findings are consistent with the trend observed in the IBEX 35 futures market study of Lafuente, J. A. and Novales, A. (2003). Our empirical evidence suggests that, contrary to what happens in less liquid markets, the discrepancy between theoretical and quoted prices in index futures contracts in fully developed markets does not represent a noise factor that can be successfully exploited for hedging. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:1050,1066, 2009 [source] A copula-based regime-switching GARCH model for optimal futures hedgingTHE JOURNAL OF FUTURES MARKETS, Issue 10 2009Hsiang-Tai LeeArticle first published online: 27 JUL 200 The article develops a regime-switching Gumbel,Clayton (RSGC) copula GARCH model for optimal futures hedging. There are three major contributions of RSGC. First, the dependence of spot and futures return series in RSGC is modeled using switching copula instead of assuming bivariate normality. Second, RSGC adopts an independent switching Generalized Autoregressive Conditional Heteroscedasticity (GARCH) process to avoid the path-dependency problem. Third, based on the assumption of independent switching, a formula is derived for calculating the minimum variance hedge ratio. Empirical investigation in agricultural commodity markets reveals that RSGC provides good out-of-sample hedging effectiveness, illustrating importance of modeling regime shift and asymmetric dependence for futures hedging. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:946,972, 2009 [source] Minimum variance cross hedging under mean-reverting spreads, stochastic convenience yields, and jumps: Application to the airline industryTHE JOURNAL OF FUTURES MARKETS, Issue 8 2009Mark Bertus Exchange traded futures contracts often are not written on the specific asset that is a source of risk to a firm. The firm may attempt to manage this risk using futures contracts written on a related asset. This cross hedge exposes the firm to a new risk, the spread between the asset underlying the futures contract and the asset that the firm wants to hedge. Using the specific case of the airline industry as motivation, we derive the minimum variance cross hedge assuming a two-factor diffusion model for the underlying asset and a stochastic, mean-reverting spread. The result is a time-varying hedge ratio that can be applied to any hedging horizon. We also consider the effect of jumps in the underlying asset. We use simulations and empirical tests of crude oil, jet fuel cross hedges to demonstrate the hedging effectiveness of the model. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:736,756, 2009 [source] Canonical valuation and hedging of index optionsTHE JOURNAL OF FUTURES MARKETS, Issue 8 2007Philip Gray Canonical valuation is a nonparametric method for valuing derivatives proposed by M. Stutzer (1996). Although the properties of canonical estimates of option price and hedge ratio have been studied in simulation settings, applications of the methodology to traded derivative data are rare. This study explores the practical usefulness of canonical valuation using a large sample of index options. The basic unconstrained canonical estimator fails to outperform the traditional Black,Scholes model; however, a constrained canonical estimator that incorporates a small amount of conditioning information produces dramatic reductions in mean pricing errors. Similarly, the canonical approach generates hedge ratios that result in superior hedging effectiveness compared to Black,Scholes-based deltas. The results encourage further exploration and application of the canonical approach to pricing and hedging derivatives. © 2007 Wiley Periodicals, Inc. Jnl Fut Mark 27: 771,790, 2007 [source] Extreme volatility, speculative efficiency, and the hedging effectiveness of the oil futures marketsTHE JOURNAL OF FUTURES MARKETS, Issue 1 2007Lorne N. Switzer This study investigates the efficiency of the New York Mercantile Exchange (NYMEX) Division light sweet crude oil futures contract market during recent periods of extreme conditional volatility. Crude oil futures contract prices are found to be cointegrated with spot prices and unbiased predictors of future spot prices, including the period prior to the onset of the Iraqi war and until the formation of the new Iraqi government in April 2005. Both futures and spot prices exhibit asymmetric volatility characteristics. Hedging performance is improved when asymmetries are accounted for. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:61,84, 2007 [source] Does an index futures split enhance trading activity and hedging effectiveness of the futures contract?THE JOURNAL OF FUTURES MARKETS, Issue 12 2006Lars Nordén Recently, several stock index futures exchanges have experimented with an altered contract design to make the contract more attractive and to increase investor accessibility. In 1998, the Swedish futures exchange (OM) split the OMX-index futures contract with a factor of 4:1, without altering any other aspect of the futures contract design. This isolated contract redesign enables a ceteris paribus analysis of the effects of a futures split. The purpose is to investigate whether the futures split affects the futures market trading activity, as well as hedging effectiveness and basis risk of the futures contract. A bivariate GARCH framework is used to jointly model stock index returns and changes in the futures basis, and to obtain measures of hedging efficiency and basis risk. Significantly increased hedging efficiency and lower relative basis risk is found following the split. In addition, evidence of an increased trading volume is found after the split, whereas the futures bid-ask spread appears to be unaffected by the split. The results are consistent with the idea that the futures split has enhanced trading activity and hedging effectiveness of the futures contract, without raising the costs of transacting at the futures market. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1169,1194, 2006 [source] An empirical analysis of the relationship between the hedge ratio and hedging horizon: A simultaneous estimation of the short- and long-run hedge ratiosTHE JOURNAL OF FUTURES MARKETS, Issue 4 2004Sheng-Syan Chen This article analyzes the effects of the length of hedging horizon on the optimal hedge ratio and hedging effectiveness using 9 different hedging horizons and 25 different commodities. We discuss the concept of short- and long-run hedge ratios and propose a technique to simultaneously estimate them. The empirical results indicate that the short-run hedge ratios are significantly less than 1 and increase with the length of hedging horizon. We also find that hedging effectiveness increases with the length of hedging horizon. However, the long-run hedge ratio is found to be close to the naïve hedge ratio of unity. This implies that, if the hedging horizon is long, then the naïve hedge ratio is close to the optimum hedge ratio. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:359,386, 2004 [source] Hedge Ratio Stability and Hedging Effectiveness of Time-Varying Hedge Ratios in Volatile Index Futures Markets: Evidence from the Asian Financial Crisis,ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, Issue 5 2010Janchung Wang C10; G13; G15 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. [source] | ||||||||||