Empirical Analysis of Index Futures Hedge Ratios: Evidence from S&P 500, FTSE 100, Nikkei 225, and TAIEX

Yu-Fen Chen (), Cheng-Few Lee (), Fu-Lai Lin and Jing-Tang Wu ()
Additional contact information
Yu-Fen Chen: Department of Business Administration, Da-Yeh University, 168 University Rd., Dacun, Changhua 51591, Taiwan, R.O.C.
Cheng-Few Lee: Department of Finance and Economics, School of Business, Rutgers University Piscataway, New Jersey 08854-8054, USA
Fu-Lai Lin: Department of Finance, Da-Yeh University 168 University Rd., Dacun, Changhua 51591, Taiwan, R.O.C.
Jing-Tang Wu: College of Management, Da-Yeh University, 168 University Rd., Dacun, Changhua 51591, Taiwan, R.O.C.

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2025, vol. 28, issue 01, 1-18

Abstract: This study provides a comparative analysis of hedging determination for four international equity index futures, namely S&P 500, FTSE 100, Nikkei 225, and TAIEX futures contracts. Three alternative estimations are used to determine the hedge ratio for sizing hedge positions: a conventional OLS model, a conventional OLS model with an AR(2)-GARCH(1,1) error structure and an error correction model. Additionally, we evaluate the hedging effectiveness of these alternative models in different stock markets. First, three alternative methods of conducting optimal hedging in different markets are not identical. Moreover, comparisons of in-sample hedging performance reveal that the conventional OLS model outperforms two alternative models for these four stock markets. However, our out-of-sample hedging performance reveals that all hedge ratios which considering heteroscedastic error or cointegration relationship are superior to that of hedge ratio estimated by conventional OLS model. Overall, it is found that considering the existence of heteroscedastic error structure or cointegration relationship cannot be ignored when sizing hedge positions.

Keywords: Hedge ratio; conventional OLS model; conventional OLS model with an AR(2)-GARCH(1; 1) error structure; error correction model; hedging performance (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S021909152550002X
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:rpbfmp:v:28:y:2025:i:01:n:s021909152550002x

Ordering information: This journal article can be ordered from

DOI: 10.1142/S021909152550002X

Access Statistics for this article

Review of Pacific Basin Financial Markets and Policies (RPBFMP) is currently edited by Cheng-few Lee

More articles in Review of Pacific Basin Financial Markets and Policies (RPBFMP) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().