The Hedging Effectiveness of U.K. Stock Index Futures Contracts Using an Extended Mean Gini Approach: Evidence for the FTSE 100 and FTSE Mid250 Contracts

30 Pages Posted: 1 Jul 2015

See all articles by Darren Butterworth

Darren Butterworth

Durham University - Department of Economics and Finance

Phil Holmes

Durham University

Date Written: June 30, 2015

Abstract

This paper provides the first investigation of the hedging effectiveness of the FTSE 100 and FTSE Mid 250 stock index futures contracts using hedge ratios generated within an extended mean Gini framework. This framework provides a robust alternative to the standard minimum variance approach, by distinguishing between different classes of risk aversion and producing hedge ratios that are consistent with the rules of stochastic dominance. The results show that the appropriate hedge ratio varies considerably with the investor’s degree of risk aversion and that the EMG approach is capable of being utilized by all classes of risk averse investors, in contrast to the standard minimum variance approach. In addition, the results show strong evidence of a duration effect and support the use of the extended mean Gini approach when cross hedges are involved.

Keywords: hedging, futures, mean-gini, risk aversion

JEL Classification: G10

Suggested Citation

Butterworth, Darren and Holmes, Phil, The Hedging Effectiveness of U.K. Stock Index Futures Contracts Using an Extended Mean Gini Approach: Evidence for the FTSE 100 and FTSE Mid250 Contracts (June 30, 2015). Multinational Finance Journal, Vol. 9, No. 3/4, p. 131-160, 2005, Available at SSRN: https://ssrn.com/abstract=2625061

Darren Butterworth (Contact Author)

Durham University - Department of Economics and Finance

Durham, DH1 3HY
United Kingdom

Phil Holmes

Durham University ( email )

Dept. of Economics & Finance 23-26 Old Elvet
Durham DH1 3HY
United Kingdom
+44 191 374 5975 (Phone)
+44 191 374 7289 (Fax)

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