The Mib30 Index and Futures Relationship: Econometric Analysis and Implications for Hedging

16 Pages Posted: 16 Dec 2003

See all articles by Francesco Pattarin

Francesco Pattarin

CEFIN Centro Studi di Banca e Finanza - Università di Modena e Reggio Emilia

Riccardo Ferretti

Università di Modena e Reggio Emilia - Dipartimento di Comunicazione e Economia

Date Written: October 17, 2003

Abstract

This paper examines the interactions between the Mib30 stock market index and its future contract. Using daily data for the 1994-2002 period, we find that the cost-of-carry model holds as an equilibrium relationship between spot and futures prices. Deviations from equilibrium are corrected by movements in the spot market, but cross-market dynamics are also important in the short run. We model the time-varying feature of the daily returns' volatility as driven by Autoregressive Conditional Heteroscedastic innovations, and we use this model to estimate minimum-variance hedge ratios. In- and out-of-sample comparisons with static hedging show that, by carefully choosing the ARCH specification, a significant improvement in variance reduction can be achieved.

Keywords: stock index futures, price discovery, hedging, bivariate ARCH models

JEL Classification: G11, G14, C53

Suggested Citation

Pattarin, Francesco and Ferretti, Riccardo, The Mib30 Index and Futures Relationship: Econometric Analysis and Implications for Hedging (October 17, 2003). Available at SSRN: https://ssrn.com/abstract=458842 or http://dx.doi.org/10.2139/ssrn.458842

Francesco Pattarin (Contact Author)

CEFIN Centro Studi di Banca e Finanza - Università di Modena e Reggio Emilia ( email )

viale Berengario 51
Modena, 41100
Italy
+39 059 2056816 (Phone)

Riccardo Ferretti

Università di Modena e Reggio Emilia - Dipartimento di Comunicazione e Economia ( email )

Viale Allegri, 9
Reggio Emilia, Modena 42121
Italy

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