International Hedge Ratios for Index Futures Market: A Simultaneous Equations Approach

Cheng Few Lee, Fu-Lai Lin () and Mei-Ling Chen
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Fu-Lai Lin: Department of Finance, Da-Yeh University, 168 University Rd, Da-Tsuen, Changhua, Taiwan 51591, R.O.C.
Mei-Ling Chen: Department of International Business Management, Da-Yeh University, Taiwan

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2010, vol. 13, issue 02, 203-213

Abstract: The main purpose of this paper is to investigate hedge ratios in terms of the international index futures markets. Instead of looking at hedging in a single market, we construct a simultaneous equations system to study the index hedging in the light of the cross-country linkage and interaction. The three-stage least squares (3SLS) estimating procedure is then applied to CAC40 and FTSE100 indices over the period 1990–2008. The empirical results indicate that the cross-country hedging strategy in both markets is feasible and the investors can bring down the holding position in own futures market. Moreover, the hedging effectiveness of cross-country hedging strategy performs better than the traditional single market hedging strategy in terms of the percentage reduction in variance.

Keywords: Hedge ratio; cross-country linkage; simultaneous equation; three-stage least squares (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219091510001913

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