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Testing the Hedging Effectiveness of Index and Individual Stock Futures Contracts:Evidence from India


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1 Department of Management, I. K. Gujral Punjab Technical University, Kapurthala, Punjab, India
     

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Present study attempts to estimate hedging effectiveness in Indian equity futures market using NIFTY50 index futures and its 17 composite stock futures (out of 50 stocks). The study uses near month futures contracts from their respective date of inception until March 31, 2017. The study applies eight methods, proposed in the literature, to estimate optimal hedge ratio namely; Naïve, Ederington’s OLS, ARMA-OLS, VAR, VECM, GARCH, EGARCH, and TARCH. It is observed that OLS hedge ratio provides highest hedging effectiveness, whereas lowest hedging effectiveness is given by Naïve and time-varying models. The above observations imply that constant hedging is more efficient than dynamic hedging which is consistent with the findings of Wang et al (2015) and Bonga and Umoetok (2016).

Keywords

Equity Futures Market, GARCH, Hedging Effectiveness, OLS, Optimal Hedge Ratio.
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  • Testing the Hedging Effectiveness of Index and Individual Stock Futures Contracts:Evidence from India

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Authors

Mandeep Kaur
Department of Management, I. K. Gujral Punjab Technical University, Kapurthala, Punjab, India
Kapil Gupta
Department of Management, I. K. Gujral Punjab Technical University, Kapurthala, Punjab, India

Abstract


Present study attempts to estimate hedging effectiveness in Indian equity futures market using NIFTY50 index futures and its 17 composite stock futures (out of 50 stocks). The study uses near month futures contracts from their respective date of inception until March 31, 2017. The study applies eight methods, proposed in the literature, to estimate optimal hedge ratio namely; Naïve, Ederington’s OLS, ARMA-OLS, VAR, VECM, GARCH, EGARCH, and TARCH. It is observed that OLS hedge ratio provides highest hedging effectiveness, whereas lowest hedging effectiveness is given by Naïve and time-varying models. The above observations imply that constant hedging is more efficient than dynamic hedging which is consistent with the findings of Wang et al (2015) and Bonga and Umoetok (2016).

Keywords


Equity Futures Market, GARCH, Hedging Effectiveness, OLS, Optimal Hedge Ratio.

References