Hedging Effectiveness of Constant and Time Varying Hedge Ratio in Indian Stock and Commodity Futures Markets

36 Pages Posted: 6 Aug 2008 Last revised: 28 Dec 2010

See all articles by Brajesh Kumar

Brajesh Kumar

Jindal Global Business School; IIM Ahmedabad

Priyanka Singh

Indian Institute of Management (IIM), Ahmedabad

Ajay Pandey

OP Jindal Global University - Jindal Global Law School (JGLS)

Date Written: August 6, 2008

Abstract

This paper examines hedging effectiveness of futures contract on a financial asset and commodities in Indian markets. In an emerging market context like India, the growth of capital and commodity futures market would depend on effectiveness of derivatives in managing risk. For managing risk, understanding optimal hedge ratio is critical for devising effective hedging strategy. We estimate dynamic and constant hedge ratio for S&P CNX Nifty index futures, Gold futures and Soybean futures. Various models (OLS, VAR, and VECM) are used to estimate constant hedge ratio. To estimate dynamic hedge ratios, we use VAR-MGARCH. We compare in-sample and out-of-sample performance of these models in reducing portfolio risk. It is found that in most of the cases, VAR-MGARCH model estimates of time varying hedge ratio provide highest variance reduction as compared to hedges based on constant hedge ratio. Our results are consistent with findings of Myers (1991), Baillie and Myers (1991), Park and Switzer (1995a,b), Lypny and Powella (1998), Kavussanos and Nomikos (2000), Yang (2001), and Floros and Vougas (2006).

Suggested Citation

Kumar, Brajesh and Singh, Priyanka and Pandey, Ajay, Hedging Effectiveness of Constant and Time Varying Hedge Ratio in Indian Stock and Commodity Futures Markets (August 6, 2008). Available at SSRN: https://ssrn.com/abstract=1206555 or http://dx.doi.org/10.2139/ssrn.1206555

Brajesh Kumar (Contact Author)

Jindal Global Business School ( email )

University Sonipat-Narela Road
Near Jagdishpur Vill
Sonipat, Haryana 131001
India
+918930110773 (Phone)

HOME PAGE: http://www.jgbs.edu.in

IIM Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380 015
India

Priyanka Singh

Indian Institute of Management (IIM), Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380 015
India

Ajay Pandey

OP Jindal Global University - Jindal Global Law School (JGLS) ( email )

Jindal Centre 12 Bhi12 Bhikaiji Cama Place
Near Jagdishpur Village
New Delhi, Uttar Pradesh/Haryana 110 066
India

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