Cross-Hedging Portfolios in Emerging Stock Markets: Evidence for the LATIBEX Index

Pablo Urtubia,Andrés Mora-Valencia,Alfonso Novales

doi:10.3390/math9212736

Pablo Urtubia, Andrés Mora-Valencia + Show 1 more

Open Access

https://doi.org/10.3390/math9212736

Copy DOI

Abstract

We consider alternative possibilities for hedging spot positions on the FTSE LATIBEX Index, the index of the only international market exclusively for Latin American firms that is denominated by the euro. Since there is not a futures market on the index, it is unclear whether a relatively successful hedge can be found. We explore the plausibility of employing futures on four stock market indices: EUROSTOXX 50, S&P500, BOVESPA, and IPC, and simulate the results that could be obtained by a hedge position based on either unconditional or conditional second order moments estimated from different asymmetric GARCH models. Several criteria for hedging effectiveness suggest that futures contracts on BOVESPA should be preferred, and that a salient reduction in risk can be achieved over the unhedged LATIBEX portfolio. The evidence in favor of a better performance of conditional moments is very clear, without significant differences among the alternative GARCH specifications.

Highlights

Portfolios in Emerging Stock Markets: Latin American firms have experienced robust growth in the last few decades, with large corporations, known as Multilatinas, obtaining access to ever more sophisticated, liquid, and efficient financial markets
If market prices for the portfolio to be covered and for the futures contract to use in the hedge are cointegrated, this should be taken into account in an error correction model that integrates the long-term equilibrium relationships between the portfolio to be covered and the futures contract used in the hedge with their shortterm interactions
In the absence of futures contracts on LATIBEX, an investor must consider the use of futures contracts on some other stock market index to hedge the LATIBEX portfolio

Summary

Introduction

Portfolios in Emerging Stock Markets: Latin American firms have experienced robust growth in the last few decades, with large corporations, known as Multilatinas, obtaining access to ever more sophisticated, liquid, and efficient financial markets. Under this scenario, firms in emerging Latin American countries are currently an attractive alternative for the foreign investor in search of diversification for his/her portfolio. The LATIBEX is the only international market trading for Latin American stocks, in the same currency, the euro. Unlike the LATIBEX market, MILA transactions are in the local currency of each company.

Methods

Results

Conclusion