Novales Cinca, Alfonso and 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 0223, 2002, ]
Official URL: http://eprints.ucm.es/7682/
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.
|Item Type:||Working Paper or Technical Report|
JEL classi…cation: C51, G11, G13.
|Uncontrolled Keywords:||Optimal hedging, Futures contract, Stock Index, GARCH models, Mispricing|
|Subjects:||Social sciences > Economics > Stock exchanges|
|Series Name:||Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)|
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|Deposited On:||04 Mar 2008|
|Last Modified:||06 Feb 2014 07:55|
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