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Is cross-hedging an effective strategy in equity futures market?

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  • Jose, Nithin
  • Jose, Babu
  • Varghese, James

Abstract

This paper aims to evaluate whether the cross-hedging strategy with Nifty 50 and single stock futures is an effective tool to hedge the price risk of single stock investors. The risk reduction potential of different hedge portfolios derived from the optimal hedge ratios is evaluated using the Diagonal BEKK GARCH model. The results reveal that cross-hedging is an effective risk reduction strategy for investors exposed to specific securities devoid of futures. Investors can construct cross-hedging portfolios with futures having closely matching return profiles and hold these positions for a longer trade horizon to achieve higher risk reduction.

Suggested Citation

  • Jose, Nithin & Jose, Babu & Varghese, James, 2022. "Is cross-hedging an effective strategy in equity futures market?," Finance Research Letters, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322004500
    DOI: 10.1016/j.frl.2022.103253
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    References listed on IDEAS

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    More about this item

    Keywords

    Cross-hedging; Futures; Derivatives; Hedging effectiveness; Optimal hedge ratio; Nifty 50 futures; Single stock futures;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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