![Open Access](https://i-scholar.in/lib/pkp/templates/images/icons/fulltextgreen.png)
![Restricted Access](https://i-scholar.in/lib/pkp/templates/images/icons/fulltextred.png)
![Open Access](https://i-scholar.in/lib/pkp/templates/images/icons/fulltextgreen.png)
![Open Access](https://i-scholar.in/lib/pkp/templates/images/icons/fulltext_open_medium.gif)
![Restricted Access](https://i-scholar.in/lib/pkp/templates/images/icons/fulltextred.png)
![Restricted Access](https://i-scholar.in/lib/pkp/templates/images/icons/fulltext_restricted_medium.gif)
Hedging Effectiveness of Stock Index Futures Contracts in the Indian Derivative Markets
Subscribe/Renew Journal
This paper studies hedging effectiveness in Indian stock index futures market. The main focus is on various procedures to estimate time-varying and static optimal hedge ratios. For the S&P CNX Nifty futures contract 5 different econometric models that are employed. The data set used is from 2001-2008. Traditional OLS regressions, modified OLS viz. LTS , error correction model (ECM), vector error correction model (VECM) and multivariate generalized autoregressive heteroscedastic (M-GARCH) models are used to estimate hedge ratios, not only for mirror index underlying the futures contract but also for mutual funds. It is the first exhaustive study of its kind on the Indian stock index futures market and reveals that mutual funds tend to be a good proxy for market portfolios. Simple OLS seems to provide the best hedging effectiveness in terms of risk reduction for the Indian futures market. However, the use of more complex models like VECM cannot be sublimed as they provide more or less same hedging effectiveness.
Keywords
Hedge Ratios, OLS, VECM, M-GARCH, Nifty Futures
Subscription
Login to verify subscription
User
Font Size
Information
- Baba, Y. Engle, R.F. Kraft, D.F. and Kroner, K.F. (1990) Multivariate Simultaneous Generalized ARCH, mimeo, Department of Economics, University of California, San Diego, CA.
- Baillie, R. T. and Myers, R. J. (1991) Bivariate GARCH estimation of the optimal commodity futures hedge. Journal of Applied Econometrics. 6. 109–124.
- Bera, A.K., Garcia, P. and Roh, J.S. (1997) Estimation of timevarying hedge ratios for corn and soybeans: BGARCH and random coefficient approaches, Paper, The Office for Futures and Options Research, Department of Agricultural and Consumer Economics, University of Illinois at Urbana Champaign.
- Bhaduri, S.N. and Durai, S.R.S. (2008) Optimal Hedge Ratio and Hedging Effectiveness of Stock Index Futures Evidence from India. Madras School of Economics.
- Bollerslev, T. (1986) Generalized autoregressive conditional heteroskedasticity. Journal Econometrics. 37. pp. 307–27.
- Brooks, C., Henry, O. T. and Persand, G. (2002) The effect of asymmetries on optimal hedge ratios, Journal of Business. 75, pp. 333–52.
- Butterworth, D. and Holmes, P. (2000) Ex ante hedging effectiveness of UK stock index futures contracts: evidence for the FTSE 100 and Mid 250 contracts. European Financial Management, 6. pp. 441–57.
- Butterworth, D. and Holmes, P. (2001) The hedging effectiveness of stock index futures: evidence for the FTSE-100 and FTSE-mid250 indexes traded in the UK. Applied Financial Economics. 11, pp. 57-68
- Cecchetti, S.G., Cumby, R. E. and Figlewski, S. (1988) Estimation of optimal futures hedge. Review of Economics and Statistics, 70, pp. 623–30.
- Chou, W.L., Denis, K.K.F. and Lee, C.F. (1996) Hedging with the Nikkei index futures: the conventional model versus the error correction model. Quarterly Review of Economics and Finance. 36. pp. 495–505.
- Choudhry, T. (2003) Short-run deviations and optimal hedge ratio: evidence from stock futures. Journal of Multinational Finance Management. 13. pp. 171-192.
- Engle, R. F. and Kroner, K. F. (1995) Multivariate simultaneous generalized ARCH. Econometric Theory. 11. pp. 122–150.
- Engle, R.F. (1982) Autoregressive Conditional hetreoscedasticity with Estimates of the Variance of United Kingdom Inflation. Econometrica. 50 (4). pp. 987-1008.
- Figlewski, S. (1984) Hedging Performance and Basis Risk in Stock Index Futures. Journal of Finance. 39(3), pp. 657-69.
- Floros, C. and Vougas, D.V. (2004) Hedge ratios in Greek stock index futures market. Applied Financial Economics.14. pp. 1125–1136.
- Gagon, L., Lypny, G. and McCurdy, T. (1998) Hedging Foreign Currency Portfolios. Journal of Empirical Finance. 5. pp. 197-220.
- Ghosh, A. (1993) Hedging with stock index futures: estimation and forecasting with error correction model. Journal of Futures Markets, 13. pp. 743–52.
- Ghosh, A. (1995) The hedging effectiveness of ECU futures contracts: forecasting evidence from an error correction model. Financial Review. 30. pp. 567–581.
- Ghosh, A. and Clayton, R. (1996) Hedging with international stock index futures: an intertemporal error correction model. Journal of Financial Research. 29(4). pp. 477-491.
- Granger, C.W.J. and Newbold, P. (1974) Spurious regressions in econometrics. Journal of Econometrics. 2 (2). pp. 111-120.
- Holmes, P. (1995) Ex ante hedge rat ios and the hedging effectiveness of the FTSE100 stock index futures contract. Applied Economics Letters. 2. pp. 56-59.
- Howard, C.T. and D’ Antonio, L.J. (1984) A riskreturn measure of hedging effectiveness. Journal of Financial and Quantitative Analysis, 19, pp. 101–12.
- Howard, C.T. and D’ Antonio, L.J. (1987) A riskreturn measure of hedging effectiveness: a reply. Journal of Financial and Quantitative Analysis, 22, pp. 377–81.
- Johnson, L.L. (1960) The Theory of Hedging and Speculation in Commodity Futures. Review of Economic Studies. 27(3), pp. 139-151.
- Junkus, J.C. and Lee, C.F. (1985) Use of three stock index futures in hedging decisions. Journal of Futures Markets. 5. pp. 201-222.
- Knez, P. and Ready, M. (1997) On the robust ness of size and book- to-market in crosssectional regressions. Journal of Finance. 52. pp.1355-1382.
- Kroner, K.F. and Sultan, J. (1991) Exchange rate volatility and time varying hedge ratios, in Pacific- Basin Capital Markets Research. S. G. Rhee and R. P. Chang, Elsevier Science Publishers, North-Holland, Amsterdam. 1. pp. 397-412.
- Kroner, K.F. and Sultan, J. (1993) Time varying distribution and dynamic hedging with foreign currency futures. Journal of Financial and Quantitative Analysis. 28. pp. 535–51.
- Laws, J. and Thompson, J. (2005) Hedging effectiveness of stock index futures European Journal of Operational Research. 163(1). pp. 177-191.
- Lien, D. (1993) Optimal hedging and spreading in cointegrated markets. Economic Letters. 40. pp. 91–95.
- Lien, D. and Luo, X., (1993) Estimating multiperiod hedge ratios in cointegrated markets. Journal of Futures Markets. 13. pp. 909–920.
- Lien, D., Tse, Y.K. and Tsui, A.K.C. (2002) Evaluating the hedging performance of the constant correlation GARCH model. Applied Financial Economics. 12. 791–798.
- Lien, D.D. (1996) The effect of the cointegrating relationship on futures hedging: a note. Journal of Futures Markets. 16. pp. 773–780.
- Lien, D.D. (2007) Statistical properties of postsample hedging effectiveness. International Review of Financial Analysis. 16. pp. 293-300.
- Moschini, G.C. and Myers, R.J. (2001) Testing for constant hedge ratios in commodity markets: a multivariate GARCH approach. Department of Economics, Working paper, Iowa State University. 8. pp. 237–258.
- Myers, R.J. (2000) Estimating time-varying optimal hedge ratios on futures markets. Journal of Futures Markets. 20(1). pp. 73-87.
- Myers, R.J. and Thompson, S.R. (1989) Generalized optimal hedge ratio estimation, American Journal of Agricultural Economics. 71. 858–867.
- Myers, R.J. Estimating time-varying optimal hedge ratio on futures markets. Journal of Futures Markets. 11. pp. 39–53.
- Yang, W. (2001) M-GARCH hedge ratios and hedging effectiveness in Australian futures markets, Paper, School of Finance and Business Economics, Edith Cowan University.
- Hull, J.C. (2006) Options Futures and Other Derivatives. 6th Edition United States of America: Pearson Prentice Hall.
![](https://i-scholar.in/public/site/images/abstractview.png)
Abstract Views: 388
![](https://i-scholar.in/public/site/images/pdfview.png)
PDF Views: 0