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On the stationarity of futures hedge ratios

Author

Listed:
  • Stavros Degiannakis

    (Panteion University of Social and Political Sciences)

  • Christos Floros

    (Hellenic Mediterranean University)

  • Enrique Salvador

    (Universitat Jaume I)

  • Dimitrios Vougas

    (Swansea University, Bay Campus)

Abstract

Stationarity of hedge ratios can be viewed as a first step for portfolio hedging since it represents that the sensitivity of spot and Future returns follow a process whose main characteristics do not depend on time. However, we provide evidence that the hedge ratios of the main European stock indices are better described as a combination of two different mean-reverting stationary processes, which depend on the state of the market. Also, when analysing the dynamics of hedge ratios at intraday level, results display a similar picture suggesting that intraday dynamics of the hedge between spot and Future are driven mainly by market participants with similar perspectives of the investment horizon.

Suggested Citation

  • Stavros Degiannakis & Christos Floros & Enrique Salvador & Dimitrios Vougas, 2022. "On the stationarity of futures hedge ratios," Operational Research, Springer, vol. 22(3), pages 2281-2303, July.
    • Handle: RePEc:spr:operea:v:22:y:2022:i:3:d:10.1007_s12351-020-00607-0
    DOI: 10.1007/s12351-020-00607-0
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    More about this item

    Keywords

    Future; Hedge ratios; Intra-day data; Multivariate volatility modelling; Regime-switching; Stationarity;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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