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Hedging With Futures: Contract in the Indian Stock Market

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  • Deepika Krishnan

    (Presidency University, Bangalore, India)

Abstract

This research explores the utilization of wavelet transform decomposition as an effective tool for hedging in the Indian stock market, particularly focusing on hedging with index futures contracts. Utilizing daily data obtained from the National Stock Exchange (NSE) of India spanning from 2010 to 2022, the study investigates the lead-lag relationships, correlations, and hedge ratios across different time scales through the wavelet transform method. The findings indicate a clear relationship between the Nifty 50, Nifty Bank, and Index futures in both short and longer time frames. However, in intermediate time scales, the Nifty Bank contract exhibits a leading position in the market. The correlation analysis underscores that time plays a crucial role in determining the variations, resulting in a wide range of correlations. The effectiveness of hedging, measured by the hedge ratio, displays an increasing trend across different time zones.

Suggested Citation

  • Deepika Krishnan, 2023. "Hedging With Futures: Contract in the Indian Stock Market," International Journal of Applied Behavioral Economics (IJABE), IGI Global, vol. 12(1), pages 1-18, January.
    • Handle: RePEc:igg:jabe00:v:12:y:2023:i:1:p:1-18
    as

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    References listed on IDEAS

    as
    1. Ren, Fei & Ji, Shen-Dan & Cai, Mei-Ling & Li, Sai-Ping & Jiang, Xiong-Fei, 2019. "Dynamic lead–lag relationship between stock indices and their derivatives: A comparative study between Chinese mainland, Hong Kong and US stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 513(C), pages 709-723.
    2. John Cotter & Jim Hanly, 2012. "Hedging effectiveness under conditions of asymmetry," The European Journal of Finance, Taylor & Francis Journals, vol. 18(2), pages 135-147, February.
    3. Ronald W. Anderson, 1985. "Some determinants of the volatility of futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 5(3), pages 331-348, September.
    4. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
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