Optimal hedging under departures from the cost-of-carry valuation: evidence from the Spanish stock index futures marketAlfonso Novales () and Juan Angel Lafuente Documentos del Instituto Complutense de Análisis Económico from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales Abstract: We provide an analytical discussion of the optimal hedge ratio under discrepancies between the futures market price and its theoretical valuation according to the cost-of-carry model. Assuming a geometric Brownian motion for spot prices, we model mispricing as a speci…c noise component in the dynamics of futures market prices. Empirical evidence on the model is provided for the Spanish stock index futures. Ex-ante simulations with actual data reveal that hedge ratios that take into account the estimated, time-varying, correlation between the common and specific disturbances, lead to using a lower number of futures contracts than under a systematic unit ratio, without generally losing hedging e¤ectiveness, while reducing transaction costs and capital requirements. Besides, the reduction in the number of contracts can be substantial over some periods. Finally, a meanvariance expected utility function suggests that the economic benefits from an optimal hedge are substantial. New Economics Papers: this item is included in nep-rmg Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: http://EconPapers.repec.org/RePEc:ucm:doicae:0223 Access Statistics for this paper More papers in Documentos del Instituto Complutense de Análisis Económico from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales |
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