HEDGING WITH INTERNATIONAL STOCK INDEX FUTURES: AN INTERTEMPORAL ERROR CORRECTION MODEL

Ronnie J. Clayton

45 citations0/0 files storedThe Journal of Financial Research

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Financial Risk and Volatility Modeling Financial Markets and Investment Strategies Risk Management in Financial Firms

Abstract

Abstract In this paper we extend the traditional price change hedge ratio estimation method by applying the theory of cointegration to hedging with stock index futures contracts for France (CAC 40), the United Kingdom (FTSE 100), Germany (DAX), and Japan (NIKKEI). Previous studies ignore the last period's equilibrium error and short‐run deviations. The findings of this study indicate that the hedge ratios obtained from the error correction method are superior to those obtained from the traditional method as evidenced by the likelihood ratio test and out‐of‐sample forecasts. Using the procedures developed in this paper, hedgers can control the risk of their portfolios more effectively at a lower cost.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1988Testing for a Unit Root in Time Series Regression 1981Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root 1981Some properties of time series data and their use in econometric model specification 1979The Hedging Performance of the New Futures Markets 1993Long-Run Economic Relationships: Readings in Cointegration.1976The Theory of Hedging and Speculation in Commodity Futures 1960The Theory of Hedging and Speculation in Commodity Futures

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