The Hedging Performance of the New Futures Markets: Comment

The effectiveness of index futures hedging in emerging markets during the crisis period of 2008-2010: Evidence from South Africa

“…Franckle (1980) expanded on the work done by Ederington (1979). Franckle (1980) agreed that matching a long TBill spot position with a short T-Bill futures position, proportional to the hedge ratio from the SEMOLS, improves hedging effectiveness compared to the naïve strategy. Figlewski's (1985) study assessed the effectiveness of stock index futures hedging, when they were first introduced, on the Kansas City Board of Trade in 1982.…”

“…His study concluded that the SEMOLS outperforms the naïve (one-to-one) methodology by providing lower portfolio variance. Ederington's (1979) study is important as it introduced a simple yet theoretically sound method of determining the optimal hedge ratio, which is widely applied in empirical studies such as those by Franckle (1980) and Figlewski (1985). Franckle (1980) expanded on the work done by Ederington (1979).…”

“…Ederington's (1979) study is important as it introduced a simple yet theoretically sound method of determining the optimal hedge ratio, which is widely applied in empirical studies such as those by Franckle (1980) and Figlewski (1985). Franckle (1980) expanded on the work done by Ederington (1979). Franckle (1980) agreed that matching a long TBill spot position with a short T-Bill futures position, proportional to the hedge ratio from the SEMOLS, improves hedging effectiveness compared to the naïve strategy.…”

“…This study is significant as it indicated that static hedges are not effective over long hedging periods. After the studies of Franckle (1980) and Figlewski (1985), almost all studies on the optimal hedge ratio applied Ederington's (1979) SEMOLS including: Vishwanath (1993; Ghosh (1993), Chou et al (1996); Myers (1991); Park and Switzer (1995);Wahab (1995); Holmes (1996);Choudhry (2003); Laws and Thompson (2005); Yang and Allen (2005); as well as Bhaduria and Duraia (2008). Figlewski's (1985) study prompted an important question in financial economics literature: can one's portfolio remain hedged ad infinitum with the same hedge ratio?…”

“…Studies by Ederington (1979), Franckle (1980), Figlewski (1985), Vishwanath (1993), Ghosh (1993), Chou et al (1996), Myers (1991), Park and Switzer (1995), Holmes (1996), Laws and Thompson (2005) as well as Yang and Allen (2005) have applied different | 2 econometric hedging methods in order to estimate the optimal hedge ratio. These methods range from the Single Equation Method estimated by Ordinary Least Squares (Ederington (1979), Franckle (1980) and Figlewski (1985)); the Vector Autoregression Method (Vishwanath (1993), Ghosh (1993) and Chou et al (1996)); Vector ErrorCorrection Method (Vishwanath (1993), Ghosh (1993) and Chou et al (1996)); to a class of Multivariate GARCH methods (Myers (1991), Park and Switzer (1995) Wahab (1995)). Consequently, it is important to determine the suitable econometric methodology for the appraisal of optimal hedge ratio.…”