On the stationarity of futures hedge ratios
- PDF / 1,737,035 Bytes
- 23 Pages / 439.37 x 666.142 pts Page_size
- 94 Downloads / 191 Views
On the stationarity of futures hedge ratios Stavros Degiannakis1 · Christos Floros2 · Enrique Salvador3 · Dimitrios Vougas4 Received: 6 April 2020 / Revised: 18 August 2020 / Accepted: 12 September 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract Stationarity of hedge ratios can be viewed as a first step for portfolio hedging since it represents that the sensitivity of spot and Future returns follow a process whose main characteristics do not depend on time. However, we provide evidence that the hedge ratios of the main European stock indices are better described as a combination of two different mean-reverting stationary processes, which depend on the state of the market. Also, when analysing the dynamics of hedge ratios at intraday level, results display a similar picture suggesting that intraday dynamics of the hedge between spot and Future are driven mainly by market participants with similar perspectives of the investment horizon. Keywords Future · Hedge ratios · Intra-day data · Multivariate volatility modelling · Regime-switching · Stationarity JEL Classification G13 · C58 · G15 · C32
* Christos Floros [email protected] Stavros Degiannakis [email protected] Enrique Salvador [email protected] Dimitrios Vougas [email protected] 1
Department of Economics and Regional Development, Panteion University of Social and Political Sciences, 136 Andrea Syngrou Avenue, 17671 Athens, GR, Greece
2
Department of Accounting and Finance, Hellenic Mediterranean University, Estavromenos, 71004 Heraklion, Crete, GR, Greece
3
Finance and Accounting Department, Universitat Jaume I, Avenida Sos Baynat s/n, 12071 Castellon de la Plana, Spain
4
Department of Accounting and Finance, School of Management, Swansea University, Bay Campus, Swansea SA1 8EN, UK
13
Vol.:(0123456789)
S. Degiannakis et al.
1 Introduction Stationarity of hedge ratios indicates a stable relationship between spot and Future prices. Since hedgers seek for reducing the risk of their investments, reliable dynamics of hedge ratios are expected. If not, Future mark may lose its usefulness to hedgers since the risk diversification can be hard to achieve. The property of stationarity motivates investors to use diversification strategies and can be utilised by policy makers to stabilize financial mark. A hedge is a spread between a spot asset and a Future position that reduces risk.1 Thus, the hedge ratio is defined as the number of Future contracts bought or sold divided by the number of spot contracts whose risk is being hedged. A considerable amount of research has focused on modelling the distribution of spot and Future prices and applies the results to estimate the optimal hedge ratio using various type of models (see Chen et al. 2003; Floros and Vougas 2004; Salvador and Arago 2014; Wang et al. 2014; Dai et al. 2017). Although most of the previous studies on optimal hedge ratios are successful in capturing the time-varying covariance-variances, almost all of them focus only on the estimate of the hedge ratios.
Data Loading...
