Optimal Hedge Ratios for the Mexican Stock Market Index Futures Contract: A Multivariate GARCH Approach

Roberto Santillán-Salgado (), Luis Jacob Escobar () and Francisco López-Herrera ()
Additional contact information
Luis Jacob Escobar: Tecnológico de Monterrey, Campus Monterrey

Economía: teoría y práctica, 2020, vol. 53, issue 2, 201-238

Abstract: This work compares different hedging strategies that use the Mexican Stock Exchange (MSE) Index futures contract traded at the Mercado Mexicano de Derivados – (Mexican Derivatives Market or MexDer), to minimize the impact of stock price fluctuations on the value of a well-diversified portfolio (the Mexican Stock Exchange Index, or IPC). We study the ex-post empirical performance of each using the daily closing contract’s price and the MSE Index for a period from December 30th, 1999, through December 30th, 2016. The set of hedging strategies we compare includes: a) a No-hedge strategy; b) a Naive hedge ratio (1 to 1); c) a constant hedge ratio, (obtained from an OLS); and d) a dynamic hedge ratio, obtained using a Constant Conditional Correlation Bivariate GARCH model, with Asymmetric Responses. Moreover, the sample period has four structural breaks, so the analysis is divided in five subperiods. The different strategies are compared using different risk measures: Value at Risk, Expected Shortfall aand LAQ. In all cases, hedging effectively reduces the volatility of the portfolio, but the dynamic hedge ratio produces the best possible results, while the constant hedge ratio is a close second.

Keywords: Futures contracts; hedging strategies; emerging derivatives markets. (search for similar items in EconPapers)
JEL-codes: G11 G13 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.24275/ETYPUAM/NE/532020/Santillan (application/pdf)

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:ety:journl:v:53:y:2020:i:2:p:201-238

Access Statistics for this article

Economía: teoría y práctica is currently edited by Georgina Alenka Guzmán Chávez

More articles in Economía: teoría y práctica from Universidad Autónoma Metropolitana, México
Bibliographic data for series maintained by Georgina Alenka Guzmán Chávez ().