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Optimal hedging under departures from the cost-of-carry valuation: evidence from the Spanish stock index futures market

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Novales Cinca, Alfonso y Lafuente Luengo, Juan Ángel (2002) Optimal hedging under departures from the cost-of-carry valuation: evidence from the Spanish stock index futures market. [ Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 23, 2002, ]

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Resumen

We provide an analytical discussion of the optimal hedge ratio under
discrepancies between the futures market price and its theoretical
valuation according to the cost-of-carry model. Assuming a geometric
Brownian motion for spot prices, we model mispricing as a speci…c
noise component in the dynamics of futures market prices. Empirical
evidence on the model is provided for the Spanish stock index
futures. Ex-ante simulations with actual data reveal that hedge ratios
that take into account the estimated, time-varying, correlation
between the common and speci…c disturbances, lead to using a lower
number of futures contracts than under a systematic unit ratio, without
generally losing hedging e¤ectiveness, while reducing transaction
costs and capital requirements. Besides, the reduction in the number
of contracts can be substantial over some periods. Finally, a meanvariance
expected utility function suggests that the economic bene…ts
from an optimal hedge are substantial.


Tipo de documento:Documento de trabajo o Informe técnico
Información Adicional:

JEL classi…cation: C51, G11, G13.

Palabras clave:Optimal hedging, Futures contract, Stock Index, GARCH models, Mispricing
Materias:Ciencias Sociales > Economía > Mercados bursátiles y financieros
Título de serie o colección:Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volumen:2002
Número:23
Código ID:7682
Depositado:04 Mar 2008
Última Modificación:21 Jun 2017 08:54

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