IDEAS home Printed from https://ideas.repec.org/a/ety/journl/v53y2020i2p201-238.html
   My bibliography  Save this article

Optimal Hedge Ratios for the Mexican Stock Market Index Futures Contract: A Multivariate GARCH Approach

Author

Listed:
  • Roberto J. Santillán-Salgado

    (EGADE Business School, Tecnológico de Monterrey, Campus Monterrey,)

  • Luis Jacob Escobar

    (Tecnológico de Monterrey, Campus Monterrey)

  • Francisco López-Herrera

    (División de Investigación, Facultad de Contaduría y Administración, UNAM)

Abstract

This work compares different hedging strategies that use the Mexican Stock Exchange (MSE) Index futures contract traded at the Mercado Mexicano de Derivados – (Mexican Derivatives Market or MexDer), to minimize the impact of stock price fluctuations on the value of a well-diversified portfolio (the Mexican Stock Exchange Index, or IPC). We study the ex-post empirical performance of each using the daily closing contract’s price and the MSE Index for a period from December 30th, 1999, through December 30th, 2016. The set of hedging strategies we compare includes: a) a No-hedge strategy; b) a Naive hedge ratio (1 to 1); c) a constant hedge ratio, (obtained from an OLS); and d) a dynamic hedge ratio, obtained using a Constant Conditional Correlation Bivariate GARCH model, with Asymmetric Responses. Moreover, the sample period has four structural breaks, so the analysis is divided in five subperiods. The different strategies are compared using different risk measures: Value at Risk, Expected Shortfall aand LAQ. In all cases, hedging effectively reduces the volatility of the portfolio, but the dynamic hedge ratio produces the best possible results, while the constant hedge ratio is a close second.

Suggested Citation

  • Roberto J. Santillán-Salgado & Luis Jacob Escobar & Francisco López-Herrera, 2020. "Optimal Hedge Ratios for the Mexican Stock Market Index Futures Contract: A Multivariate GARCH Approach," Economía: teoría y práctica, Universidad Autónoma Metropolitana, México, vol. 53(2), pages 201-238, Julio-Dic.
    • Handle: RePEc:ety:journl:v:53:y:2020:i:2:p:201-238
    DOI: 10.24275/ETYPUAM/NE/532020/Santillan
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.24275/ETYPUAM/NE/532020/Santillan
    Download Restriction: no
    File URL: https://libkey.io/10.24275/ETYPUAM/NE/532020/Santillan?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Keywords

    Futures contracts; hedging strategies; emerging derivatives markets.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ety:journl:v:53:y:2020:i:2:p:201-238. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Georgina Alenka Guzmán Chávez (email available below). General contact details of provider: https://edirc.repec.org/data/etyuamx.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.