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Examining the Hedging Effectiveness of Futures Contracts over Pre and Post Financial Crisis Period:Evidence from National Stock Exchange of India


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1 Punjab Institute of Management (PIM), I. K. Gujral Punjab Technical University, Kapurthala, Punjab, India
     

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Present study examines the efficiency of futures contracts in hedging unwanted price risk over highly volatile period i.e. June 2000-December 2007 and January 2008-June 2014, pre and post-financial crisis period, by using S&PCNXNIFTY, CNXIT and BANKNIFTY for near month futures contracts. The hedge ratios have been estimated by using five methods namely Ederington's Model, ARMA-OLS, GARCH (p,q), EGARCH (p,q) and TGARCH (p,q). The study finds that hedging effectiveness increased during post crisis period for S&PCNXNIFTY and BANKNIFTY. However, for CNXIT hedging effectiveness was better during pre crisis period than post crisis. The study also finds that time-invariant hedge ratio is more efficient than time-variant hedge ratio.

Keywords

Hedge Ratio, Hedge Horizon, Basis Risk, Heteroscedasticity, Conditional Volatility.
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  • Examining the Hedging Effectiveness of Futures Contracts over Pre and Post Financial Crisis Period:Evidence from National Stock Exchange of India

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Authors

Kapil Gupta
Punjab Institute of Management (PIM), I. K. Gujral Punjab Technical University, Kapurthala, Punjab, India
Mandeep Kaur
Punjab Institute of Management (PIM), I. K. Gujral Punjab Technical University, Kapurthala, Punjab, India

Abstract


Present study examines the efficiency of futures contracts in hedging unwanted price risk over highly volatile period i.e. June 2000-December 2007 and January 2008-June 2014, pre and post-financial crisis period, by using S&PCNXNIFTY, CNXIT and BANKNIFTY for near month futures contracts. The hedge ratios have been estimated by using five methods namely Ederington's Model, ARMA-OLS, GARCH (p,q), EGARCH (p,q) and TGARCH (p,q). The study finds that hedging effectiveness increased during post crisis period for S&PCNXNIFTY and BANKNIFTY. However, for CNXIT hedging effectiveness was better during pre crisis period than post crisis. The study also finds that time-invariant hedge ratio is more efficient than time-variant hedge ratio.

Keywords


Hedge Ratio, Hedge Horizon, Basis Risk, Heteroscedasticity, Conditional Volatility.

References