Universidad Complutense de Madrid
E-Prints Complutense

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

Impacto

Downloads

Downloads per month over past year



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 23, 2002, ]

[img]
Preview
PDF
525kB

Official URL: http://eprints.ucm.es/7682/


URLURL Type
https://www.ucm.es/icaeOrganisation


Abstract

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
Uncontrolled Keywords:Optimal hedging, Futures contract, Stock Index, GARCH models, Mispricing
Subjects:Social sciences > Economics > Stock exchanges
JEL:C51, G11, G13
Series Name:Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2002
Number:23
ID Code:7682
Deposited On:04 Mar 2008
Last Modified:05 Dec 2017 09:58

Origin of downloads

Repository Staff Only: item control page