Impact Of Financial Crisis On Hedging Effectiveness Of Futures Contracts: Evidence From The National Stock Exchange Of India

Gupta Kapil and Kaur Mandeep ()
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Gupta Kapil: Punjab institute of Management (PIM), India
Kaur Mandeep: Punjab institute of Management (PIM), India

South East European Journal of Economics and Business, 2015, vol. 10, issue 2, 69-88

Abstract: The present study examines the impact of the 2008 financial crisis on the hedging effectiveness of three index futures contracts traded on the National Stock Exchange of India for near, next and far month contracts over the sample period of January 2000 – June 2014. The hedge ratios were calculated using eight methods; Naive hedging, Ederington’s Model, Autoregressive Integrated Moving Average, Vector Autoregressive, Vector Error Correction Methodology, Generalized Autoregressive Conditional Heteroskedasticity, Exponential Generalized Autoregressive Conditional Heteroscedasticity and Threshold Generalized Autoregressive Conditional Heteroskedasticity. The study finds an improvement in hedging effectiveness during the post-crisis period, which implies that during the high-volatility period hedging effectiveness also improves. It was also found that near month futures contracts are a more effective tool for hedging as compared to next and far month contracts, which imply that liquidity is a more important determinant of hedging effectiveness than hedge horizons. The study also finds that a time-invariant hedge ratio is more efficient than time-variant hedging. Therefore, knowledge of sophisticated econometrical tools does not help to improve hedge effectiveness.

Keywords: Hedge ratio; hedge horizon; financial crisis; heteroscedasticity; conditional volatility (search for similar items in EconPapers)
JEL-codes: C13 C22 C32 D81 D82 G14 N25 O16 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:seejeb:v:10:y:2015:i:2:p:69-88:n:3

DOI: 10.1515/jeb-2015-0009

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South East European Journal of Economics and Business is currently edited by Adnan Efendic, Vesna Babić-Hodović and Aziz Šunje

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