Hedging with Foreign-listed Single Stock Futures

Mao-wei Hung, Cheng Few Lee and Leh-chyan So ()

MPRA Paper from University Library of Munich, Germany

Abstract: The objective of this paper is to estimate the hedge ratios of foreign-listed single stock futures (SSFs) and to compare the performance of risk reduction of different methods. The OLS method and a bivariate GJR-GARCH model are employed to estimate constant optimal hedge ratios and the dynamic hedging ratios, respectively. Data of the SSFs listed on the London International Financial Future and Options Exchange (LIFFE) are used in this research. We find that the data series have high estimated constant optimal hedge ratios and high constant correlation in the bivariate GJR- GARCH model, except for three SSFs with their underlying stocks traded in Italy. Our findings provide evidence that distance is a critical factor when explaining investor’s trading behavior. Results also show that in general, of the three methods examined (i.e., naïve hedge, conventional OLS method, and dynamic hedging) the dynamic hedging performs the best and that naïve hedge is the worst.

Keywords: Hedging; GJR-GARCH; Hedge ratios; SSFs; Single stock futures; LIFFE; USFs (search for similar items in EconPapers)
JEL-codes: G12 G13 G15 (search for similar items in EconPapers)
Date: 2005
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https://mpra.ub.uni-muenchen.de/52372/1/MPRA_paper_52372.pdf original version (application/pdf)

Related works:
Chapter: Hedging with Foreign-Listed Single Stock Futures (2005)
Chapter: Hedging with Foreign-Listed Single Stock Futures (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:52372

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