Cross Hedging Effectiveness of Real Estate Securities Exchange Traded Funds

Abstract

The analyses cover different full sample periods from 2000 to 2010 inclusive, the global financial crisis (GFC) period and four phases of the GFC depending on data availability to document the performances of the hedge during times of high and low volatility. The results show that the real estate ETFs were very effective in hedging EREIT and all the sampled real estate securities in Europe and Asia. Secondly, VECM hedge marginally outperformed OLS hedge when the ETFs and the real estate securities returns were cointegrated. Thirdly, we find that hedging effectiveness evidenced by variance reduction does not necessarily equate to economic viability. Therefore it is advisable to use VR and UIs together to determine viability of hedging effectiveness. Finally, given different levels of risk aversion vis-à-vis expected utility, it was, and therefore may be concluded that it could be, advisable/inadvisable to use the ETFs to hedge during periods of high/low volatility.

Cross-Hedging Portfolios in Emerging Stock Markets: Evidence for the LATIBEX Index

“…However, in the absence of futures contracts on the LATIBEX index, it is necessary to analyze cross-hedging possibilities using futures contracts on other markets. Cross-hedging has been studied extensively, Anderson and Danthine [1] were among the first to discuss cross-hedging in a theoretical way, later Eaker and Grant [2] delved into the treatment of cross currency hedging, measuring the effectiveness of hedging when there are no futures on a currency, and, recently, there have been several applications of cross-hedging of: Commodities, such as [3], who evaluated the effectiveness of cross-hedging of commodities between the metal and spot futures markets; Energy, such as [4], who analyzed the cross-hedging of aviation fuel with commodity futures; Stock Indices, such as [5], who examined the effectiveness of cross-hedging between a UK stock index and global stock index futures from developed and emerging markets; Real Estate, such as [6], who analyzed the effectiveness of cross-hedging real estate securities with ETFs, among other various applications.. Hence, this paper tries to answer four questions: (1) Is it effective to hedge a position in the LATIBEX index with a futures contract on another stock market index?…”

Exchange traded funds in Europe and the US

“…Exposure to broad areas of the markets can be offered at impressively low costs. An investor could gain exposure to a broad cross section of US equities for as little as 0.03% per year; emerging market equities cost as little as 0.14% 4 Not all ETFs are regulated under the Investment Company Act of 1940. Those ETFs that invest in futures contracts, commodities, and currencies are not registered with the U.S. Securities and Exchange Commission and are not regulated under the Investment Company Act of 1940.…”