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Hedge Ratio and Correlation between the Stock and the Futures Markets: Evidence from the Wavelet Analysis

Francis Haeuck In
Monash University - Department of Accounting and Finance

Sangbae Kim
Kyungpook National University - School of Business Administartion



EFMA 2003 Helsinki Meetings

Abstract:     
This paper examines the relationship between the stock and the futures return over the various time horizons. In contrast to previous studies, wavelet analysis allows us to decompose the data into various time scales. Using this technique, we find that in the short- and long-run, there is a feedback relationship, while in the intermediate-run, the futures market leads the stock market. The correlation between the two markets varies over time but remains very high. Furthermore, the magnitude of the correlation increases as the time scale increases, indicating that the stock market and the futures market of the All Ordinaries Index are found to be not fundamentally different. The hedge ratio increases as the time scale increases. In other words, the effectiveness of the hedging strategies initially increases with the hedging horizon.

Working Paper Series

Date posted: May 30, 2003 ; Last revised: May 30, 2003

Suggested Citation

Kim, Sangbae and In, Francis Haeuck, Hedge Ratio and Correlation between the Stock and the Futures Markets: Evidence from the Wavelet Analysis. EFMA 2003 Helsinki Meetings. Available at SSRN: http://ssrn.com/abstract=393200 or doi:10.2139/ssrn.393200


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Contact Information

Francis Haeuck In (Contact Author)
Monash University - Department of Accounting and Finance ( email )
Building 11E
Clayton, Victoria 3800 Australia
+61 3 9905 1561 (Phone)
+61 3 9905 5475 (Fax)
Sangbae Kim
Kyungpook National University - School of Business Administartion ( email )
Daegu 702-701, Taegu Korea
+82 53 950 7413 (Phone)
+82 53 950 6247 (Fax)
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