Cross Hedging with Single Stock Futures
Ryan Davies and
Sang Soo Kim ()
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Sang Soo Kim: ICMA Centre, University of Reading
ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading
This study evaluates the efficiency of cross hedging with the new single stock futures (SSF) contracts recently introduced in the United States. We use matched sample estimation techniques to select SSF contracts that will reduce the basis risk of crossing hedging and will yield the most efficient hedging portfolio. Employing multivariate matching techniques with cross-sectional matching characteristics, we can improve hedging efficiency while at the same time overcoming the contingency of the correlation between spot and futures prices on the sample period and length. Overall, we find that the best hedging performance is achieved through a portfolio that is hedged with market index futures and a SSF matched by both historical return correlation and cross-sectional matching characteristics. We also find it preferable to retain the chosen SSF contracts for the whole out-of-sample period but to re-estimate the optimal hedge ratio for each rolling window.
Pages: 27 pages
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Published in Assurances et gestion des risques 74:4, 2007, 473-504
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