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Testing the Hedging Effectiveness of Index and Individual Stock Futures Contracts: Evidence from India

International Journal of Banking, Risk and Insurance

Volume 6 Issue 2

Published: 2018
Author(s) Name: Mandeep Kaur, Kapil Gupta | Author(s) Affiliation: Research Scholar, Dept. of Mgt., I. K. Gujral Punjab Technical University, Kapurthala, Punjab, India
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Abstract

Present study attempts to estimate hedging effectiveness in Indian equity futures market using NIFTY50 index futures and its 17 composite stock futures (out of 50 stocks). The study uses near month futures contracts from their respective date of inception until March 31, 2017. The study applies eight methods, proposed in the literature, to estimate optimal hedge ratio namely; Naïve, Ederington’s OLS, ARMA-OLS, VAR, VECM, GARCH, EGARCH, and TARCH. It is observed that OLS hedge ratio provides highest hedging effectiveness, whereas lowest hedging effectiveness is given by Naïve and time-varying models. The above observations imply that constant hedging is more efficient than dynamic hedging which is consistent with the findings of Wang et al (2015) and Bonga and Umoetok (2016).

Keywords: Equity Futures Market, GARCH, Hedging Effectiveness, OLS, Optimal Hedge Ratio

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