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The Hedging Effectiveness of Stock Index Futures: Evidence for the S&P CNX Nifty Index Traded in India

Author

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  • Pradhan Kailash

    (National Council of Applied Economic Research (NCAER), New Delhi-110002)

Abstract

This study evaluates optimal hedge ratios and the hedging effectiveness of stock index futures. The optimal hedge ratios are estimated from the ordinary least square (OLS) regression model, the vector autoregression model (VAR), the vector error correction model (VECM) and multivariate generalized autoregressive conditional heteroskedasticity (M-GARCH) models such as VAR-GARCH and VEC-GARCH using the S&P CNX Nifty index and its futures index. Hedging effectiveness is measured in terms of within sample and out of sample risk-return trade-off at various forecasting horizons. The analysis found that the VEC-GARCH time varying hedge ratio provides the greatest portfolio risk reduction and generates the highest portfolio returns.

Suggested Citation

  • Pradhan Kailash, 2011. "The Hedging Effectiveness of Stock Index Futures: Evidence for the S&P CNX Nifty Index Traded in India," South East European Journal of Economics and Business, Sciendo, vol. 6(1), pages 111-123, April.
    • Handle: RePEc:vrs:seejeb:v:6:y:2011:i:1:p:111-123:n:10
    DOI: 10.2478/v10033-011-0010-2
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    Cited by:

    1. Babu Jose & Nithin Jose, 2023. "Is Cross-Hedging Effective for Mitigating Equity Investment Risks in the Indian Banking Sector?," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(1), pages 189-210, March.
    2. Mandeep Kaur & Kapil Gupta, 2019. "Estimating Hedging Effectiveness Using Variance Reduction And Risk-Return Approaches: Evidence From National Stock Exchange Of India," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 8(4), pages 149-169.

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