The authors are grateful for financial support from the Ministerio de Educación y Ciencia project ECO2011-27227, Programa de Fomento de Proyectos I+D Universitat Jaume I P1 1B2012-07 and Fundació Caixa Castelló Bancaixa project P1 1B2009-54. They also appreciate the insightful comments from one anonymous referee throughout the refereeing process.
Measuring Hedging Effectiveness of Index Futures Contracts: Do Dynamic Models Outperform Static Models? A Regime-Switching Approach
Article first published online: 14 FEB 2013
© 2013 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 34, Issue 4, pages 374–398, April 2014
How to Cite
Salvador, E. and Aragó, V. (2014), Measuring Hedging Effectiveness of Index Futures Contracts: Do Dynamic Models Outperform Static Models? A Regime-Switching Approach. J. Fut. Mark., 34: 374–398. doi: 10.1002/fut.21598
- Issue published online: 4 MAR 2014
- Article first published online: 14 FEB 2013
- Manuscript Accepted: 31 DEC 2012
- Manuscript Received: 3 JUN 2011
This study estimates linear and nonlinear GARCH models to find optimal hedge ratios with futures contracts for some of the main European stock indexes. By introducing nonlinearities through a regime-switching model, we can obtain more efficient hedge ratios and superior hedging performance in both an in-sample and an out-sample analysis compared to the other methodologies (constant hedge ratios and linear GARCH). Moreover, nonlinear models also reflect the different patterns followed by the dynamic relationship between the volatility of spot and futures returns during low- and high-volatility periods. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:374–398, 2014