Optimal hedging under departures from the cost of carry valuation: evidence from the spanish stock index futures market

Juan Angel Lafuente

DEE - Working Papers. Business Economics. WB from Universidad Carlos III de Madrid. Departamento de Economía de la Empresa

Abstract: This paper provides an a~alytical discussion of the optimal hedge ratio when discrepancies between the futures trading price and its theoretical valuation according to the cost-of-carry model occurs. Under the assumption of a geometric Brownian motion for spot prices we model the mispricing by a new specific noise in the theoretical dynamic of futures market. Empirical evidence above the model is provided for the Spanish stock index futures. Ex-post simulations reveal that hedging effectiveness applying the estimated ratio is similar to the achieved with a systematic unitary hedge ratio, the optimal one when a mispricing does not appear. However, a small number of futures contracts is needed.

Keywords: Hedge; Futures; Stock; index; GARCH; Mispricing (search for similar items in EconPapers)
JEL-codes: C51 G11 G13 (search for similar items in EconPapers)
Date: 2000-01
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Journal Article: Optimal hedging under departures from the cost-of-carry valuation: Evidence from the Spanish stock index futures market (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:cte:wbrepe:9853

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