A Comparative Analysis of Hedging Determination for Three Alternative International Equity Index Futures

Abstract

This study provides a comparative analysis of hedging determination for three alternative international equity index futures, namely FTSE 100, NIKKEI 225 and S&P 500 futures contracts. Both the conventional regression and the error correction modeling approaches are used to estimate the minimum-variance hedge ratios and to evaluate the hedging effectiveness. Comparisons of out-of-sample hedging performance reveal that the error correction model outperforms the conventional model, suggesting that the error correction model serves as a better hedging model than conventional model in a hedge using stock index. In addition, the effects of temporal aggregation on hedge ratio estimates and hedging effectiveness are evaluated. It is found that temporal aggregation plays an important role on sizing hedging positions and measuring hedge effectiveness.