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The Mib30 index and futures relationship: econometric analysis and implications for hedging

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  • Francesco Pattarin
  • Riccardo Ferretti

Abstract

The interactions between the Mib30 stock market index and its future contract are examined. Using daily data for the 1994-2002 period, it is found that the cost-of-carry model holds as an equilibrium relationship between spot and futures prices. Deviations from equilibrium are corrected by movements in the spot market, but cross-market dynamics are also important in the short run. We model the time-varying volatility of daily returns' as an autoregressive conditional heteroscedastic process; this model used to estimate minimum-variance hedge ratios. In- and out-of-sample comparisons with static hedging show that, by carefully choosing the ARCH specification, a significant improvement in variance reduction can be achieved.

Suggested Citation

  • Francesco Pattarin & Riccardo Ferretti, 2004. "The Mib30 index and futures relationship: econometric analysis and implications for hedging," Applied Financial Economics, Taylor & Francis Journals, vol. 14(18), pages 1281-1289.
    • Handle: RePEc:taf:apfiec:v:14:y:2004:i:18:p:1281-1289
    DOI: 10.1080/09603100412331313578
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    Cited by:

    1. Aysegul Ates, 2016. "Relation between ISE 30 index and ISE 30 index futures markets: Evidence from recursive and rolling cointegration," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 4(1), pages 35-42, February.
    2. Pok, Wee Ching & Poshakwale, Sunil S. & Ford, J.L., 2009. "Stock index futures hedging in the emerging Malaysian market," Global Finance Journal, Elsevier, vol. 20(3), pages 273-288.
    3. Gurmeet Singh, 2017. "Estimating Optimal Hedge Ratio and Hedging Effectiveness in the NSE Index Futures," Jindal Journal of Business Research, , vol. 6(2), pages 108-131, December.

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