The Mib30 index and futures relationship: econometric analysis and implications for hedging

Francesco Pattarin () and Riccardo Ferretti

Applied Financial Economics, 2004, vol. 14, issue 18, 1281-1289

Abstract: The interactions between the Mib30 stock market index and its future contract are examined. Using daily data for the 1994-2002 period, it is found that the cost-of-carry model holds as an equilibrium relationship between spot and futures prices. Deviations from equilibrium are corrected by movements in the spot market, but cross-market dynamics are also important in the short run. We model the time-varying volatility of daily returns' as an autoregressive conditional heteroscedastic process; this model used to estimate minimum-variance hedge ratios. In- and out-of-sample comparisons with static hedging show that, by carefully choosing the ARCH specification, a significant improvement in variance reduction can be achieved.

Date: 2004
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DOI: 10.1080/09603100412331313578

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