Do the advantages of offshore exchanges enhance hedging effectiveness? - evidence from Japanese and Indian dual-listed index futures

Sivakumar Sundararajan and Senthil Arasu Balasubramanian

Applied Economics, 2025, vol. 57, issue 22, 2922-2939

Abstract: This study aims to evaluate the hedging effectiveness of dual-listed Indian Nifty-50 and Japanese Nikkei-225 stock index futures with varied contract characteristics under different market conditions and hedging horizons to assess whether the greater trading offer by offshore exchange prompts greater hedging effectiveness. In the first step, we examine the connectedness among the offshore, onshore and spot markets followed by hedging effectiveness in the second step. Our findings consistently reveal that onshore INR-denominated Nifty futures outperform offshore USD-denominated Nifty futures while considering only the price risk of the portfolio; however, hedging effectiveness of offshore Nifty futures is better than onshore futures while considering price risk and currency risk of returns. For the same currency (JPY) denominated Nikkei-225 futures contracts, offshore contracts offer superior hedging effectiveness than onshore futures. Strategies devised for pre-, during- and post-COVID-19 periods and different time horizons yield similar results. Our findings suggest that advantages in trading offshore exchange led to higher trading volume, better liquidity and a strong correlation between futures and spot compared to onshore, all of which positively impact the hedging effectiveness.

Date: 2025
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DOI: 10.1080/00036846.2024.2331967

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