Is Cross-Hedging Effective for Mitigating Equity Investment Risks in the Indian Banking Sector?

Babu Jose () and Nithin Jose ()
Additional contact information
Babu Jose: St. Thomas College, Palai
Nithin Jose: St. Joseph’s College (Autonomous), Devagiri

Asia-Pacific Financial Markets, 2023, vol. 30, issue 1, No 9, 189-210

Abstract: Abstract Can the investments in securities devoid of futures be effectively hedged? If so, what is the best cross-hedging instrument? The study evaluates the efficacy of the cross-hedging strategy for small and medium investors interested in banking sector stocks devoid of futures using the market index, sectoral index and stock futures from the same sector. The risk mitigation ability of each portfolio is estimated for different trade horizons using near-month futures and spot prices. The optimal futures contract size for minimising risk exposure is calculated using the Diagonal BEKK GARCH model with a minimum-variance approach. The cross-hedging portfolio with BANK NIFTY futures performs consistently well in a longer trading horizon with higher hedging costs. A cross-hedging portfolio with single stock futures also shows an excellent risk reduction potential but is less expensive than other alternatives. Fundamental investors achieve risk reduction up to 53.74 per cent cross-hedging using BANK NIFTY futures. Investors can construct cross-hedging portfolios with a closely matching return profile and hold these positions for a longer trade horizon to achieve higher risk reduction.

Keywords: Cross-Hedging; Derivatives; Equity Futures Market; Futures; Hedging Effectiveness; Optimal Hedge Ratio; Single stock futures (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10690-022-09383-7 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:kap:apfinm:v:30:y:2023:i:1:d:10.1007_s10690-022-09383-7

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/10690/PS2

DOI: 10.1007/s10690-022-09383-7

Access Statistics for this article

Asia-Pacific Financial Markets is currently edited by Jiro Akahori

More articles in Asia-Pacific Financial Markets from Springer, Japanese Association of Financial Economics and Engineering
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().