Time-Varying Distribution and Hedging Effectiveness of Three Pacific-Basin Stock Futures

18 Pages Posted: 18 Dec 2000

See all articles by Taufiq Choudhry

Taufiq Choudhry

Bradford University School of Management

Abstract

This paper investigates the hedging effectiveness of Australian, Hong Kong and Japanese stock futures markets. For each market two sets of futures indices are used in the empirical tests. Effectiveness of four different hedging ratios depending on different estimation procedures are investigated. The unhedged, the traditional hedge and the minimum variance hedge ratios are all constant while the bivariate GARCH hedge ratio is time-varying. The effectiveness of the hedge ratio are compared by investigating the out-of-sample performance of the four ratios. The whole sample consist of daily returns from January 1990 to December 1998. Two out-of-sample periods are used January1997 to December 1998 (two years) and from January 1998 to December 1998 (one year). Results show that the time-varying GARCH hedge ratio out-performs the constant ratios in most of the cases but not all. This is true using both out-of-sample periods.

Keywords: Hedge Ratio, Bivariate GARCH, Cash Index, Futures Index, Variance

JEL Classification: G1, G13

Suggested Citation

Choudhry, Taufiq, Time-Varying Distribution and Hedging Effectiveness of Three Pacific-Basin Stock Futures. EFMA 2000 Athens. Available at SSRN: https://ssrn.com/abstract=251408 or http://dx.doi.org/10.2139/ssrn.251408

Taufiq Choudhry (Contact Author)

Bradford University School of Management ( email )

Emm Lane
Bradford, West Yorkshire Bd9 4JL
United Kingdom
+44 (0)1274 234363 (Phone)
+44 (0)1274 235680 (Fax)

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