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Liquidity and hedging effectiveness under futures mispricing: International evidence

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  • A. Andani
  • J. A. Lafuente
  • A. Novales

Abstract

We analyze the hedging effectiveness of positions that replicate stock indexes using corresponding futures contracts through the application of a dynamic, stochastic hedging strategy proposed by Lafuente, J. A. and Novales, A. (2003). Conclusive gains do not emerge in any of the markets analyzed over the period considered, relative to the use of a constant unit hedge ratio. These findings are consistent with the trend observed in the IBEX 35 futures market study of Lafuente, J. A. and Novales, A. (2003). Our empirical evidence suggests that, contrary to what happens in less liquid markets, the discrepancy between theoretical and quoted prices in index futures contracts in fully developed markets does not represent a noise factor that can be successfully exploited for hedging. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:1050–1066, 2009

Suggested Citation

  • A. Andani & J. A. Lafuente & A. Novales, 2009. "Liquidity and hedging effectiveness under futures mispricing: International evidence," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(11), pages 1050-1066, November.
    • Handle: RePEc:wly:jfutmk:v:29:y:2009:i:11:p:1050-1066
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    Cited by:

    1. Lee, Seungho & Meslmani, Nabil El & Switzer, Lorne N., 2020. "Pricing Efficiency and Arbitrage in the Bitcoin Spot and Futures Markets," Research in International Business and Finance, Elsevier, vol. 53(C).
    2. Lin, Xiaoqiang & Chen, Qiang & Tang, Zhenpeng, 2014. "Dynamic hedging strategy in incomplete market: Evidence from Shanghai fuel oil futures market," Economic Modelling, Elsevier, vol. 40(C), pages 81-90.
    3. Chyi Lee & Simon Stevenson & Ming-Long Lee, 2014. "Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Futures," The Journal of Real Estate Finance and Economics, Springer, vol. 48(2), pages 299-322, February.
    4. Seungho Lee, 2022. "The COVID-19 pandemic, short-sale ban, and market efficiency: empirical evidence from the European equity markets," Journal of Asset Management, Palgrave Macmillan, vol. 23(2), pages 156-171, March.
    5. Edyta Marcinkiewicz, 2016. "Short Sale and Index Futures Mispricing: Evidence from the Warsaw Stock Exchange," Prague Economic Papers, Prague University of Economics and Business, vol. 2016(5), pages 547-559.

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