EVIDENCE ON HEDGE RATIOS CHANGES AROUND THE SUBPRIME MORTGAGE CRISIS

Wei-Hsi Hsu, Yung-Shi Liau and Jack J.W. Yang

Global Journal of Business Research, 2010, vol. 4, issue 3, 61-71

Abstract: During the subprime mortgage crisis period, the New Century Financial Corporation was the biggest subprime mortgage lender in the United States and declared bankruptcy on April 2, 2007. This paper compared two types of hedge ratios--the hedge ratio before April 2, 2007 and the hedge ratio after April 2, 2007. We applied the hedge ratios of American, British, Canadian, German, Hong Kong and Japanese stock futures markets to examine the hypothesis. It is shown that the serious subprime mortgage crisis has led to a greater average hedge ratio in all six markets and the average hedge ratio has had a more obvious change in America, Britain, and Hong Kong. In other words, the results show that when the investors are in the asymmetry return of the financial assets they are inclined to weigh adverse evidence more heavily. The results are consistent with the findings of Lien (2005). These findings are helpful to risk managers dealing with stock index futures in the above markets.

Keywords: Hedge ratios; Subprime mortgage crisis; DCC GARCH (search for similar items in EconPapers)
JEL-codes: G01 G15 (search for similar items in EconPapers)
Date: 2010
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