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The effectiveness of dynamic hedging: evidence from selected European stock index futures

Sultan, Jahangir, Hasan, Mohammad S (2008) The effectiveness of dynamic hedging: evidence from selected European stock index futures. European Journal of Finance, 14 (6). pp. 469-488. ISSN 1351-847X. (doi:10.1080/13518470801890685) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided) (KAR id:23562)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided.
Official URL:
http://dx.doi.org/10.1080/13518470801890685

Abstract

This paper estimates time-varying optimal hedge ratios (OHRs) using a bivariate generalized autoregressive conditional heteroscedastic(GARCH) error correction model. The GARCH specification accounts for timevarying distribution in asset returns while the error correction term preserves short-run deviations between two fundamentally linked assets. Using stock index and stock index futures from four European countries, we compare the hedging effectiveness of the GARCH error correction model with alternative hedging models that hold the OHR constant. Overall, in three out of four cases, the GARCH error correction model is shown to offer superior risk reduction compared with the competing models. Finally, we also estimate the OHRs using the GARCH-X model, which allows the error correction term to be a determinant of the time-varying volatility. The GARCH-X model performs similar to the GARCH error correction model. The results presented in this paper have important insights into the risk management of financial assets when returns distribution changes over time.

Item Type: Article
DOI/Identification number: 10.1080/13518470801890685
Uncontrolled keywords: stock index futures; bivariate GARCH-X; error correction term; time varying minimum variance hedge ratio; out of sample hedge effectiveness
Subjects: H Social Sciences
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: Mohammad Hasan
Date Deposited: 06 Jan 2010 10:40 UTC
Last Modified: 16 Nov 2021 10:01 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/23562 (The current URI for this page, for reference purposes)

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