The Mib30 Index and Futures Relationship: Econometric Analysis and Implications for Hedging
16 Pages Posted: 16 Dec 2003
Date Written: October 17, 2003
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
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