Are regression approach futures hedge ratios stationary?

Ferguson, Robert A.; Leistikow, Dean

doi:10.1002/(sici)1096-9934(199810)18:7<851::aid-fut5>3.0.co;2-v

Cited by 14 publications

(8 citation statements)

References 6 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Including the lags did not make much difference for the optimal hedge ratios and hence, the results regarding reinforcement and cannibalism. This is in line with the recent findings of Ferguson and Dean (1998). In the paper we present the results without the lags.…”

Section: Empirical Illustrationsupporting

confidence: 92%

Futures Exchange Innovations: Reinforcement versus Cannibalism

Pennings

Leuthold

1999

SSRN Journal

View full text Add to dashboard Cite

Futures exchanges are in constant search of futures contracts that will generate a profitable level of trading volume. In this context, it would be interesting to determine what effect the introduction of new futures contracts have on the trading volume of the contracts already listed. The introduction of new futures contracts may lead to a volume increase for those contracts already listed and hence, contribute to the success of a futures exchange. On the other hand, the introduction of new futures contracts could lead to a volume decrease for the contracts already listed, thereby undermining the success of the futures exchange accordingly. Using a multi-product hedging model in which the perspective has been shifted from portfolio to exchange management, we study these effects. Using data from two exchanges that are different regarding market liquidity (Amsterdam Exchanges versus Chicago Board of Trade) we show the usefulness of the proposed tool. Our findings have several important implications for a futures exchange's innovation policy. * Research support provided by the Niels Stensen Foundation and the Foundation for Research in Derivatives is gratefully acknowledged. The authors express special thanks to R.A. Collins, M.T.G. Meulenberg, D.F. Broens, M. Rockinger, and the faculty of the Office for Futures and Options Research at the University of Illinois at Urbana-Champaign who provided helpful comments on the research project and preliminary versions of this manuscript. We thank Joseph Poncer from the Chicago Board of Trade for providing data on the soybean complex and H. den Hertog from the Amsterdam Exchanges for providing data on the financial futures.

show abstract

Section: Empirical Illustrationsupporting

confidence: 92%

Futures Exchange Innovations: Reinforcement versus Cannibalism

Pennings

Leuthold

1999

SSRN Journal

View full text Add to dashboard Cite

show abstract

“…However, portfolio hedging approach suggests that a hedger has a wide range of hedge ratios available and the hedger may choose the hedge ratio as per risk preference (Howard & D’Antonio, 1984; Jensen, Johnson, & Mercer, 2000). Moreover, the portfolio hedging approach allows for estimating time varying optimal hedge ratios and this was not possible in the conventional hedge theories and Working’s hedge theories (also see Aggarwal & Demaskey, 1997; Bhaduri & Durai, 2007; Chen et al, 2004; Ferguson & Leisikow, 1998; Koutmos & Pericli, 1998; Lien & Tse, 1998; Myers, 1991; Theobald & Yallup, 1997; Yang & Allen, 2004).…”

Section: Literature Reviewmentioning

confidence: 99%

“…The hedge ratio is calculated as the ratio of covariance of futures and cash market returns to the variance of futures market returns. Ederington’s efficient hedge ratio is not time varying hedge ratio, but it has got huge support in the academic literature (see Aggarwal & Demaskey, 1997; Bhaduri & Durai, 2007; Chen et al, 2004; Ferguson & Leisikow, 1998; Theobald & Yallup, 1997; Yang & Allen, 2004). Lien (2005) suggested that except when major structural changes have taken place in the markets, the hedge ratio based on the ordinary least square method will outperform the time varying hedge ratio.…”

Section: Literature Reviewmentioning

confidence: 99%

“…During the short run particularly near to the expiry date conventional hedging theory may work efficiently as basis risk is found to be negatively associated with time to expiry of futures contract (Arias, Brorsen, & Harri, 2000; Chen et al, 2004; Collins, 2000; Lien & Tse, 1998; Lien, 2000). Ferguson and Leistikow (1998) mentioned that hedge ratio computed over long run will be stationary, by applying Dickey–Fuller test, the rejection of constant hedge ratio hypothesis may be the result of inadequate data points.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Various hedge theories like conventional hedge theory, working’s theory, and Ederington’s efficient hedge theory assumes constant hedging ratio; however, time varying hedge ratio is more efficient than constant hedge ratio (e.g., see Aggarwal & Demaskey, 1997; Bhaduri & Durai, 2007; Bhargava & Malhotra, 2007; Ferguson & Leistikow, 1998; Koutmos & Pericli, 1998; Lien & Tse, 1998; Theobald & Yallap, 1997; Yang & Allen, 2004).…”

Section: Literature Reviewmentioning

confidence: 99%

See 2 more Smart Citations

Estimating Optimal Hedge Ratio and Hedging Effectiveness in the NSE Index Futures

Singh¹

2017

Jindal Journal of Business Research

View full text Add to dashboard Cite

This study attempts to study and suggest an optimal hedge ratio to Indian investors and traders by examining the three main indices of National Stock Exchange of India (NSE), namely, NIFTY, Bank NIFTY, and IT NIFTY, over the sample period from January 2011 to December 2015. The present study estimated the hedge ratio through six econometric models, namely, OLS, GARCH, EGARCH, TARCH, VAR, and VECM, in the minimum variance hedge ratio framework as suggested by Ederington (1979). The findings of the present study confirm the theoretical properties of Indian cash and futures market and suggest that the optimal hedge ratio estimated through EGARCH model was lowest for the NIFTY and Bank NIFTY, and that for IT NIFTY, the OLS model shows the lowest optimal hedge ratio as compared to that estimated through other models.

show abstract

On the stationarity of futures hedge ratios

et al. 2020

View full text Add to dashboard Cite

Stationarity of hedge ratios can be viewed as a first step for portfolio hedging since it represents that the sensitivity of spot and futures returns follow a process whose main characteristics do not depend on time. However, we provide evidence that the hedge ratios of the main European stock indices are better described as a combination of two different mean-reverting stationary processes, which depend on the state of the market. Also, when analysing the dynamics of hedge ratios at intraday level, results display a similar picture suggesting that intraday dynamics of the hedge between spot and futures are driven mainly by market participants with similar perspectives of the investment horizon.

show abstract

Are regression approach futures hedge ratios stationary?

Cited by 14 publications

References 6 publications

Futures Exchange Innovations: Reinforcement versus Cannibalism

Futures Exchange Innovations: Reinforcement versus Cannibalism

Estimating Optimal Hedge Ratio and Hedging Effectiveness in the NSE Index Futures

On the stationarity of futures hedge ratios

Contact Info

Product

Resources

About