EconPapers    
Economics at your fingertips  
 

Optimal hedge ratio and hedging effectiveness of stock index futures: evidence from India

Saumitra Bhaduri () and S. Raja Sethu Durai

Macroeconomics and Finance in Emerging Market Economies, 2008, vol. 1, issue 1, 121-134

Abstract: In a free capital mobile world with increased volatility, the need for an optimal hedge ratio and its effectiveness is warranted to design a better hedging strategy with future contracts. This study analyses four competing time series econometric models with daily data on NSE Stock Index Futures and S&P CNX Nifty Index. The effectiveness of the optimal hedge ratios is examined through the mean returns and the average variance reduction between the hedged and the unhedged positions for 1-, 5-, 10- and 20-day horizons. The results clearly show that the time-varying hedge ratio derived from the multivariate GARCH model has higher mean return and higher average variance reduction across hedged and unhedged positions. Even though not outperforming the GARCH model, the simple OLS-based strategy performs well at shorter time horizons. The potential use of this multivariate GARCH model cannot be sublined because of its estimation complexities. However, from a cost of computation point of view, one can equally consider the simple OLS strategy that performs well at the shorter time horizons.

Keywords: optimal hedge ratio; multivariate GARCH model; stock index futures (search for similar items in EconPapers)
Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/17520840701859856 (text/html)
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:taf:macfem:v:1:y:2008:i:1:p:121-134

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REME20

DOI: 10.1080/17520840701859856

Access Statistics for this article

Macroeconomics and Finance in Emerging Market Economies is currently edited by Subrata Sarkar and Ashima Goyal

More articles in Macroeconomics and Finance in Emerging Market Economies from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().

 
Page updated 2022-08-03
Handle: RePEc:taf:macfem:v:1:y:2008:i:1:p:121-134